Big Banks Carve Niche in Microbusiness Loan Market
In 2008, microbusiness loans totaled $170.5 billion, which was a $10.8 billion increase over loans funded in 2007, according to the SBA's new "Small Business and Micro Business Lending in the United States." The study looked at lending activity at commercial banks, savings banks and savings and loans, but did not include credit unions.
Loans under $100,000 accounted for 69.2% of the number of loans made by the largest lenders, defined as those with $10 billion to $50 billion in assets, by the end of June 2008. Their share of the value of these loans increased from 52.7% in 2006 to 60.9% in 2008.
While there is renewed interest in approving microloans by big banks, credit unions may have an edge if they offer a package of services that includes merchant offerings.
"Increases in both the dollar amount and volume may be attributed to continued efforts to promote small business credit cards by credit card issuers," said Chad Moutray, chief economist and director of economic research at the SBA's office of advocacy.
Credit unions may see an advantage in increased bank consolidations, according to the report. The number of lenders with assets under $500 million was down by 150 in 2008. The total number of lending institutions as of June 2008 was 7,380. Even though the number of multi-billion-dollar institutions with assets over $10 billion declined from 106 to 100 as a result of continued merger and acquisition activity, they still accounted for 66% of the total business loans and 76.5% of total assets in 2008.
"In the current financial climate, it's especially critical for small firms to know which banks and financial institutions have been the most likely to make small and microbusiness loans," said SBA Advocacy Economist Victoria Williams, who co-authored the study with Senior Economist Charles Ou.
Indeed, larger corporations may set the pace for how business lending shakes out over the next few years. As the economy attempts to recover, bigger businesses may continue to increase their use of external funds and contribute the most to total business borrowing as a result of merger and acquisition activity between 2007 and 2008. The SBA found that borrowing by large corporations in loan sizes over $1 million increased to 12.2% in 2008 compared with 11.7% in 2007.
Up a bracket to the $100,000 to $1 million loan range, large banks either stalled or were not as aggressive in approving these amounts, according the SBA report. The share of the dollar amount outstanding in this category increased slightly, from 42.3% in June 2006 to just 43.9% in 2008. The share of the number of loans made in this category increased from 37.8% to 42%. Williams and Ou said as bank mergers continue, "It will be important to continue monitoring this development."
Meanwhile, credit unions and other financial institutions with less than $10 billion in assets remain vital contributors to the lending market even as banks maintain dominance, providing loans, capital leases, credit lines to 60.3% of all small business borrowers.
"One vital ingredient essential to small business survival is access to credit. The health and growth of small businesses is critical and depends on knowing how lending institutions are meeting small firm credit needs and which lenders are investing in small businesses," the report noted.
Being armed with this information not only helps small businesses save valuable time in shopping for credit, but it also gives lending institutions, such as credit unions, information about the demand for and supply of small business credit. It also helps them learn about the competition they face in the markets they participate in, according to the authors of the SBA's report.