Four branches of the Federal Reserve Bank have jointly released findings from their annual small-business credit surveys.
The Joint Small Business Credit Survey Report, produced from data compiled by the Federal Reserve branches in Atlanta, Cleveland, New York and Philadelphia, revealed varied demand for credit across businesses grouped by size, as well as significant difficulty for smaller businesses.
The survey split small businesses into four categories. It defined businesses with less than $250,000 in revenue as microbusinesses, while small businesses were defined as having revenues between $250,000 and $1 million. Midsize firms have between $1 million and $10 million in revenue, and commercial firms have revenues greater than $10 million.
Funding continues to be difficult to obtain for firms in the microbusiness and small-business categories, with 52 percent of microbusinesses and 50 percent of small businesses surveyed reporting they received none of the financing they had applied for. Another 11 percent of microbusinesses and 10 percent of small businesses got less than half of the financing they sought.
“One reason is that these businesses don”™t have an established credit history,” said John Tolomer, CEO of The Westchester Bank, about small businesses that get denied loans. “Sometimes these newer businesses aren”™t as experienced at telling the whole story.”
The whole story, Tolomer said, means a business has to show where primary and secondary sources of funds to repay a loan would come from.
From an academic perspective, Matthew Carey, the director of the Center for Financial Market Studies at Iona College in New Rochelle, said he does not find the results surprising.
“Nascent businesses always have trouble, and it”™s always tougher because it”™s not balance sheet or cash-flow lending,” Carey said.
Sixty percent of midsize businesses received all the funding they applied for, and 70 percent of commercial businesses got all the funding for which they applied. Just 20 percent of commercial businesses and 14 percent of midsize businesses applied for credit and received no funding.
The smaller businesses received funding from small regional and community banks more often than larger banks.
“Online lenders and computerized loan applications use algorithms,” Tolomer said. He noted that small-business customers often had face-to-face relationships with small regional and community banks, better enabling them to “tell the story” and get the funding they sought from those sources.
Larger business had greater demand for credit than smaller businesses. While 22 percent of firms overall reported applying for credit in the first half of 2014, there was considerably weaker demand among firms with less revenue. Only 18 percent of microbusinesses applied for credit, while 30 percent each of small businesses and midsize firms applied. In contrast, 58 percent of commercial firms sought credit.
The survey, which provides information on the business conditions and financing needs of small businesses from a 10-state coverage area, also showed that more than half of the businesses that applied for credit were looking for less than $100,000, and that 72 percent sought less than $250,000.
For firms seeking financing, almost 40 percent of the firms surveyed said the primary purpose for the funding sought was to expand their business.
Small firms primarily turn to large national and regional banks for financing, but almost one in five applicants applied to an online lender in the first half of 2014. Approval rates were highest at large and small regional banks and online lenders. Of firms that applied to a small regional or community bank, 60 percent were approved for at least some of the financing sought.
“Banks went through 15 years of consolidation, and that took the focus off the smaller end of the market,” Carey said. “The big banks made the decision that it”™s not a profitable segment, so they put their balance sheets to work on the higher end. Lending to that segment takes time, it”™s difficult to automate, and they are constantly monitoring the credit.”
In the near term, Carey said he sees alternative lenders like OnDeck Capital and Lending Club filling the void for lending options for small businesses.
“When you see companies like OnDeck and Lending Club gearing up to go public, they see an opportunity,” Carey said. “They”™ll concede the high end market to the banks, because they”™re not after that market.”
