Still Much Ado About Nothing? More Proof Banks Continue to Dominate Small Business Market
WASHINGTON -- When it comes to wooing the small business market, there's more evidence that commercial banks clearly remain the dominant players.
A just-released report from the Federal Reserve Board, Financial Services Used by Small Businesses: Evidence from the 2003 Survey of Small Business Finances, gathered data from 4,240 small businesses in the United States at the end of 2003. Eighty-seven percent said they used commercial banks for their business needs compared to 8% for credit unions and 14% for thrifts. Larger firms with at least $2.5 million in sales tended to use at least one commercial bank. In contrast, the use of credit unions declined with size and the use of thrift institutions did not vary systematically with size. Between 1998 and 2003, the use of credit unions increased from 6% to 8%. The report did note that the increase "suggests that the deregulation of business lending by those institutions and the expansion in potential credit union membership permitted by the relaxation in the definition of 'common bonds' by the National Credit Union Administration in recent years may have enabled these institutions to better meet the financial service demands of small businesses." Looking closer at which financial institution small businesses use in different parts of the country, those in New England were much more likely to use thrift institutions (52%). Thrifts in this region tend to resemble commercial banks when it comes to business lending, the report's data showed. Credit unions were most likely to have been used by firms located in the Pacific part of the West while Black-owned and Hispanic-owned businesses were less likely than non-Hispanic-owned or white-owned firms to use commercial banks. Asian-owned firms were more likely to use commercial banks than other groups and female-owned firms were less likely than male-owned firms to use commercial banks. Competition continues to come from nontraditional players. Small business use of nondepository financial institutions such as finance companies and factors, brokerage and pension firms, leasing companies, and insurance and mortgage companies grew from 40% to 54% between 1998 and 2003, according to the report. Other competitors included in this category are credit card and check processing firms, government sources, family and individuals, business firms, suppliers and venture capital firms. The use of financial nondepositories also varied with the race, ethnicity, and sex of the business owners. White-owned and male-owned firms used financial nondepositories, finance companies, brokerages, and leasing companies more often than did other types of firms. The differences were largest among groups using brokerage firms. Fifteen percent of white-owned firms used brokerages, compared with 11% of nonwhite or Hispanic-owned firms. In 2003, 24% of firms used other nondepositories such as card and check processors, government, family and individuals, other businesses, supplier businesses, and venture capital firms, up from 16% in 1998. "Most of this increase is due to a rise in the use of card and check processors (from 4% in 1998 to 13% in 2003), which may, in turn, partly reflect increased use and acceptance of credit and debit cards by small businesses," the report noted. The survey results showed that in 2003 the use of family and individuals was most common among younger firms partly because they tend to have difficulty borrowing from traditional financial institutions as many require that prospective borrowers provide several years of financial statements with their loan applications. Small businesses surveyed said they overwhelmingly turned to commercial banks for nearly all products including checking accounts, saving accounts, credit lines, loans, and capital leases. Commercial banks supplied 83% of checking accounts to small businesses surveyed compared to 4% at credit unions, 11% at thrifts and 2% at brokerages. In 2003, commercial banks provided 41% of firms with credit lines, loans, and capital leases, up from 39% in 1998. Credit lines, used by about one-third of businesses, were the most commonly used form of credit supplied by commercial banks, thrifts and finance companies. Credit unions barely registered among small businesses when it came to mortgages used for business purposes at .03%, according to the report. Nine percent of firms used commercial banks, 2% used thrifts, 1% turned to mortgage companies and 1% depended on family and other individuals. Car loans were obtained mostly at finance companies followed by commercial banks. The only area where commercial banks did not dwarf others was with capital leases, which were mainly obtained from finance and leasing companies. Other financial management services used by small businesses such as trust services and credit card processing were also tracked in the Fed's report. Again, commercial banks led the pack followed by a tie between brokerages and credit card processing firms. By individual service, transaction services were mainly used at commercial banks. Twenty-one percent used credit card processing here, 6% for cash services and 4% for credit services. Brokerages were the most widely used source of trust and pension services at 10% and brokerage services at 5%. In other areas, Internet banking and online loan applications "increased markedly" between 1998 and 2003, as has the payment of business expenses with credit cards, especially business credit cards, according to the report. "[Despite] the growth in the use of nondepository sources--from 25 percent of firms in 1987 to 54 percent in 2003--commercial banks remained the dominant supplier of most financial services, the report read. --email@example.com