Even as the economy shows signs of recovery, it is no secret that one of the greatest challenges for small business continues to be securing growth capital. America’s 28 million small businesses are critical to the economy and are responsible for over half of all private sector jobs. In fact, small business has been responsible for creating two of every three new jobs over the last four years. However, small business owners in overwhelming numbers report that the primary hindrance to expanded growth and more hiring is access to capital. 

Capital is the life blood of small business, necessary to support expansion, whether this is accomplished by adding new people, new products, new locations or more production capacity. Small businesses need working capital to fund the next project, purchase inventory to meet growing demand and to carry accounts receivable from a more active customer base … and of course, access to these funds is critically important to you as an equipment finance professional. We all know small business financial confidence is central to the new equipment investment decision. As a finance professional with a focus on small business customers, no one is more familiar with the working capital challenge and few are in a better position to provide positive and valuable solutions. The leasing industry has a big interest in addressing the problem of capital short falls because customers do more equipment leasing when they have capital to grow.

So, how is it that the system has failed to fully meet the working capital requirements of small business and how big is the problem? There is no question that bad practices and ineffective management within the banking industry contributed meaningfully to the long running credit crunch and deep recession of 2008 to 2010. The pace of recovery has also been slowed by tighter credit given expanded government regulation. The financial crisis and regulatory response contributed to an abrupt and damaging decrease in loan activity to small business. Fewer banks, greater asset concentration, more stringent capital requirements, increased underwriting costs and expanded regulation has made small business lending even less attractive for banks. The numbers support the emergence of this “credit gap.”

According to the FDIC, there was $178 billion in small business loan balances (those less than $250,0000) held by banks in 2014. This is down by an astounding $100 billion since 2008! This rapid contraction of small business credit has played a big role in alerting people to the small business working capital “credit crunch,” but it is really part of a longer term issue. Small business lending has been dominated by banks. According to the numbers, by the end of 2014, business loans of $1 million or less held by banks totaled $298 billion, a pretty big number and just over 20% of all business loans held by banks. Impressive, but put in a relative context, maybe not so much. Small business loans accounted for as much as 50% of all business loans as recently as 1995.

This contraction from 50% to 20% of bank loans being made to small business is a huge relative decline demonstrating steady erosion of bank lending to small business over the last 20 years. This longer term trend coincides directly with banking industry consolidation. The number of U.S. banks has gone from 14,000 to less than 7,000 and over 80% of industry activity is concentrated in the largest 100 banks. Banks with assets greater than $10 billion turn down 80% of small business loan applications. Remarkably, four out of five small businesses get pushed aside or are offered ineffective solutions like business credit cards or home equity loans.

Smaller banks aren’t much better, turning down a little over half of small business loan applications. Of course, industry consolidation has disproportionately reduced the number of smaller banks that are more likely to approve a small business loan request. Even in the limited circumstances when bank capital is available, small businesses want loans that don’t really match up with bank loan products, which are characterized by long and laborious underwriting processes, larger loan sizes, longer loan durations and rigid collateral, financial statement, covenant and credit profile requirements. Small businesses want access to smaller loans more frequently, used for working capital needs where returns can be quickly realized and success is often dictated by fast access to the capital and a disciplined and timely debt repayment process.

What does this mean for small business and why does that matter to you as an equipment leasing professional? The pullback by the banks has created an opportunity for an emerging group of non-bank credit providers evolving from the legacy merchant cash advance providers. This new breed of emerging financial technology (fintech) based lenders are filling the banking industry prompted “credit gap” estimated at over $100 billion. These fintech firms, as Wall Street calls them, compete in different ways based on pricing structures, industry focus, loan amounts, due diligence processes, minimum business borrower performance and risk criteria and underlying loan funding approaches. What they all have in common is a faster, more cost effective and more borrower-friendly credit delivery process driven by advanced credit modeling and data analytics and technology-based loan servicing processes. The current competitive framework for the emerging group of non-bank lenders breaks into three distinct business models, each with differing customer acquisition strategies.

Continued on Page 2...