Guest post by Dale Gunther
I recently read a CNN article with the headline, “Banks keep lending standards tight for small firms.” The article stated that many small businesses are avoiding debt, but those who are looking for credit are not finding it any easier.
While this may hold true for some would-be borrowers, it is not because banks aren’t lending. It is because small businesses are going to the wrong banks.
Many small-business borrowers start their search for funding at large banks. But big banks are also layers deep in management, make loan decisions from a different city or state, and often use a one-size-fits-all scorecard to determine a business’s creditworthiness. Often they do not have the ability or desire to customize loan solutions for borrowers that fall outside the standard.
This is a problem for relatively young businesses, which generate a large share of new jobs. Since these young businesses often have few assets or assets that are difficult to value as collateral, lender underwriting may have to rely heavily on information about the creditworthiness of the business owners—their character, skills and other personal attributes. Small banks are often far better than large banks at analyzing this kind of subjective information because loan decisions are made locally by lenders who personally know the borrowers.
Loan volumes at such small banks grew in 2011. Even so, with burdensome new regulations, banks of all sizes are required to be more careful with their lending practices. Also affecting the numbers in media reports is reduced loan demand. It’s not just that bigger banks aren’t lending to small businesses as much as before, but also that there are fewer small businesses seeking funding due to decreased sales, fear of debt, or uncertainty about the economy or taxes.
Despite the reduced demand, industry data shows banks are lending. The Federal Deposit Insurance Corporation’s second quarter report showed resumed loan growth, which had stalled in the first quarter, with total loans and leases growing by 1.4 percent from the first quarter and 3.2 percent from Q2 2011. A Federal Reserve study released in July surveyed 64 domestic banks and found that loan demand is stronger and banks are easing loan terms on loans to large and middle-market companies.
So when you hear that banks are not lending, remember that the statement is not representative of all banks. Smaller banks are eager to make loans and here’s why: they‘ve seen net income reduce dramatically over the past few years and don’t have the complicated investment options or fee hikes that bigger banks fall back on to make up the difference. Small banks can make better margins loaning out money than investing it at today’s near-zero interest rates, so it is in their best interest to make loans to qualified small businesses.
And that is what they’re trying to do. Many banks are lending and if you’re a healthy small business in need of a loan, try a community bank to meet your borrowing needs.
Dale Gunther is vice chairman of the board of People’s Utah Bancorp, the holding company for Bank of American Fork, which is an SBA-Preferred Lender, Equal Housing Lender and Member FDIC. At the start of his 16-year tenure as CEO at Bank of American Fork, the bank had two branches and $80 million in assets; it now has 13 offices and more than $890 million in assets. Dale has served as chairman of the Utah Bankers Association and currently serves as an American Fork city councilman. This article should not be considered legal or investment advice. Seek legal and investment advice from your own qualified professional.