As of August, the national unemployment rate was hovering around 7.4 percent, which is a slight improvement over last July when the rate stalled at 8.2 percent. While this is an encouraging economic indicator, many people remain out of work, some of whom will be looking to tap into their inner entrepreneur and start a business or grow an existing company. Both options could create additional employment opportunities.
As more qualified, experienced people look to launch or expand a small business, they will be looking for lending partners but it is increasingly difficult for this niche of borrowers to secure funds. Last month, the Federal Reserve Bank of Cleveland released the report, “Why Small Business Lending Isn’t What It Used to Be,” co-authored by policy analyst Ann Marie Wiersch and visiting scholar Scott Shane.
The authors found that the number of commercial and industrial loans of less than $1 million, which is normally considered a proxy for small-business borrowing, dropped by 344,000 from mid-2007 to the end of 2012. During the same time period, the number of small businesses increased by 100,000.
“Banks have been exiting the small business loan market for over a decade,” the authors noted. “This confluence of events makes it unlikely that small business credit will spontaneously increase anytime in the near future.”
As a result of the small business loan collapse, many “alternative” lenders are entering the market as traditional lenders such as banks, and to a lesser degree credit unions, have been slow to act.
“Traditional lenders like banks are recognizing the value in partnering with alternative lenders to service the small business customers who bank with them,” noted RapidAdvance CEO Jeremy Brown, a company backed by Wells Fargo. “They recognize having the ability to utilize lenders with alternative underwriting criteria enables them to access financing for their clients that may not fit their traditional criteria—enhancing the overall relationship with the customer.”