Why Funding for Small Business Still Lags, and What Can Be Done About It

According to a new study from the Florida Atlantic University College of Business and published by the Small Business Administration, small businesses aren't receiving the capital they need to grow, especially from large banks.

The study finds that lending by banks to small businesses is down by 40% compared with the levels prior to the 2008 financial crisis. Those figures stand in contrast to a recovery in overall business lending from pre-crisis levels.

The study shows that the trend would be worse, if it wasn't for the affinity of small banks for small businesses. Since the financial crisis, small business lending—loans of $1 million or less—has grown more rapidly at small banks than at larger institutions.

Here’s what regulators need to consider, given the trends the study highlights.

Encourage big banks to lend to small businesses. This doesn’t require new laws or regulations, which would be especially challenging given the current legislative climate. Regulators such as the FTC could instead use existing laws, such as the Community Reinvestment Act, to gently—or not-so-gently—prod big banks to better serve businesses whose loan needs are modest.

Better support small institutions. Regulators and legislators should promote the formation of new community banks and also reduce regulatory burdens on small banks. Exempting small banks from undue regulations, such as rules implementing Dodd-Frank, would help them lend to small businesses.

Promote the growth of traditional non-bank lending. Credit unions are an underappreciated segment of the banking community. Regulators could raise the small business loan limits on the almost 6,000 credit unions in the U.S. Currently, they are only allowed to devote only 12.25% of their respective total assets in business loans.

These changes take time, especially in the current political and regulatory environment. Here’s what we recommend until changes happen.

Start local. We generally recommend that business owners who are seeking funding first look at local and regional banks and credit unions—especially ones with which they have a relationship. These institutions have a commitment to investing in their own communities, including accepting borrowers who might be be turned away by a large bank.

Strongly consider SBA loans. This is an option that’s specifically designed for small businesses, and an SBA loan is often easier to qualify for than funding from a bank, especially from a large bank. These loans are backed by a guarantee from the SBA for up to 85% of the loan value.

Don’t forget online lenders. Truly unbankable businesses and businesses in an emergency situation should consider this option. The interest rates from these services are higher than from traditional sources, and the terms are often worse. But the eligibility criteria is less strict, and the underwriting process is faster.

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