Over the past five years, the number of small business loans has dropped significantly, as has the value of those loans, according to the Federal Deposit Insurance Corporation (FDIC) from its Call Report data. In fact, small loans declined by 27 percent from June 2008 to June 2013.
About 25 percent of small businesses say it has become more difficult to obtain credit in the past year; 22 percent, by contrast, found the process easy, according to responses received from 600 small business to a third-quarter 2013 Wells Fargo/Gallup Small Business Index. For the same quarter in 2008, 14 percent of small business found the process more difficult, while 41 percent found the process easy. Gallup conducts the quarterly survey on behalf of Wells Fargo.
Although regulations in the post-financial crisis environment have contributed to the drop in small business lending, banks have made lending standards more stringent due to increased regulatory pressure, which has cut down lending to so-called “marginal” borrowers that might have received credit prior to the economic downturn. Banks also have less staff to manage the new rules, which are costly and time consuming. “This compliance burden is a distraction from our small business lending. Every hour I spend on compliance is an hour that could be spent with a small business customer,” Greg Ohlendorf, president and chief executive officer of First Community Bank and Trust, told Congress.
Small business owners are known to borrow personally to fund their business ventures and have also been caught up in efforts to increase consumer financial safeguards. For example, nearly all businesses surveyed—four-fifths— are using either a personal or a business credit card for their business, according to Federal Reserve data. But newer restrictions put in place for credit card issuers, meant to protect consumers, have added to the challenges small business owners face when seeking credit card financing.
The regulation that bans issuers from re-pricing credit card loans to borrowers with increased credit risk also impacts small business with increased interest rates that protect issuers from loss risk, also according to a Federal Reserve report. The higher the interest rate, the more the small business must borrow. Also, today, fewer small businesses qualify for loans and the challenges in re-pricing loans has left a less profitable demographic for lenders within the high-risk population in the credit card market. Because of this, a now large minority of high-risk small business borrowers that were once able to secure credit card loans find themselves unable to do so in today’s new economy.
The Consumer Financial Protection Bureau has been working to regulate mortgage loans, also in response to the fiscal crisis. The result? Even more challenges inflicted on small business and their attempts to obtain credit. The same is true of the emerging “ability-to-repay-rule,” which goes into effect next year and effectively limits most qualified loans to borrows with a debt-to-income ratio that does not exceed 43 percent. This rule, too will impact the ability of small business owners who access home equity to finance their business and whose debt-to-income ratio surpasses 43 percent.
Magnifying the issue is that small business owners are challenged when attempting to prove their ability to pay their loans given that lenders rely on documentation—for example, the W-2—for proof of earnings, which does not really apply in the case of small business owner income.
Despite great strides in technology and in unifying the financial community, it is regulatory response to the fiscal crisis that has contributed significantly to the challenges—not the lending opportunities—faced by today’s small business owners.
Shane, Scott. Bloomberg Businessweek/Small Business; “Collateral Damage for Small Business Credit“. 9/13/2013.