5 Reasons for the Return of SMB Lending

Published on July 25, 2013 by  , FOXBusiness

On a macro level, the volume of small business loans increased from 21.3 million to 23.5 million from June 2011 to June 2012, according to the SBA Office of Advocacy’s Small Business Lending in the United States 2012 study.

Before the Great Recession, SBA small-business loans grew steadily throughout the 2000s and hit a peak in 2008 when the total reached $711.5 billion in loans outstanding. From 2009 onward, SBA loans fell dramatically before picking up again in 2012. Overall small business loan volume in the United States is about $3 trillion — a figure that includes non-SBA loans.

As the U.S. economy improved in the past year, banks opened the spigots again, and according to the SBA report, small business lending is beginning to approach the 2008 record, missing the pre-recession peak by $124 billion.

Part of the turnaround, in my opinion, is due to the role of government. Sensing the importance of small business during his reelection year, President Obama raised SBA Administrator Karen Mills to a cabinet level position. Meanwhile, the SBA, which I believe is the most effective government agency ever created, kick-started lending by waiving guarantee fees.

Non-SBA lending also has been slow during the past five years and only now is starting to come back. Big banks were very risk averse during the recession, and bunkered down. They focused on getting their portfolios in place because of Dodd Frank, which was passed with the intention of reforming the banking system, lowering risk, increasing transparency, and monitoring the performance of “too big to fail” institutions.

In the past year or so, as the banks looked at the historical 2009-11 portfolio performance, profits were down. Banks that became overly risk averse realized they were not making money because they weren’t granting loans. The demise of retail banking during the housing bust and the end of the re-fi mortgage boom caused financial institutions to look for other sources of revenue. This resulted in the reemergence of small business lending. It became increasingly easier to make loans as the economy slowly began to improve.

So what ultimately brought about the return of small business lending? I believe it was the following reasons:

No. 1: The housing bust and pressure from Dodd Frank combined to force banks to bulk up other portions of their lending portfolios.

No. 2: The overall economy saw slow and steady signs of improvement.

No. 3: Small business borrowers who rode out the storm of the recession demonstrated better credit worthiness, which made banks more willing to lend.

No. 4: The SBA improved its technology, streamlined its processes, began to allow electronic loan applications, and lowered its fees. SBA small-business lending products, such as 7(a) loans and Small Business Express loans, made it less risky for banks to put money back out on the street for small businesses. Thus, the lending institutions became more willing to grant entrepreneurs’ funding requests.

No. 5: The secondary market for SBA loans increased, and smaller banks began selling them in those secondary marketplaces to generate income.

We have not yet fully recovered from the recession, and certainly there is room for the small business lending market to grow. However, I am happy to report that the outlook is sunnier now than in the recent past and things are looking up for the rest of 2013.

Rohit Arora is co-founder and CEO of Biz2Credit, an online credit marketplace that connects small- and medium-sized businesses with a network of 1,200+ lenders, service providers, and complementary business tools. Having arranged $800 million in funding, Biz2Credit is a leading resource for loans, lines of credit, working capital and more. Follow Rohit on Twitter @Biz2Credit and on Facebook. http://www.facebook.com/businessloan.

Read more: http://smallbusiness.foxbusiness.com/finance-accounting/2013/07/25/5-reasons-for-return-smb-lending/#ixzz2aen2X64J

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