A common complaint since the financial crisis began was that some of the Wall Street banks that were being bailed out by the federal government weren’t doing enough to help the mom-and-pop shops on Main Street.
“In 2008 when the recession hit, the impact on small business lending was pretty catastrophic,” said Greg Lehmann, managing director of Biltmore Bank of Arizona. “Not only did you have small businesses struggling with lost revenue and weakening balance sheets, but all the banks were retrenching and looking inward. The unique element about the Recession was that it hit every business sector; small business, large businesses, banks, etc. Nobody was immune to its impact.”
In 2013, small business owners and entrepreneurs have a little more reason for optimism. So far this year, big banks are approving small business loans at the highest rate in more than two years, according to Biz2Credit, which calculates its monthly Small Business Lending Index using 1,000 loan applications made over its online lending platform.
“With an improving economy, Wells Fargo is growing new lending commitments, providing more dollars to help small businesses stay competitive today and for the long term,” said Jennifer Anderson, business banking manager for Wells Fargo Arizona. “The business owners who see increased demand for their products and services are investing in their businesses now. As business owners become more confident and find more opportunities to grow and improve their businesses, we expect to do more business.”
Wells Fargo literally puts its money where its mouth is. According to SNL Financial, the bank was the nation’s largest lender to small business in 2012, lending $32.8 billion to small businesses.
But Wells Fargo isn’t alone. If you look at recent reports, small business lending is up across the board:
* Biz2Credit found that big banks — those with more than $10 billion in assets — approved 15.9 percent of the small business loan applications in February 2013, up from 11.7 percent in February 2012. Small bank approval rates have also ticked up — 50.3 percent in February, up from 47.6 percent in February 2012.
* Government-guaranteed loans have increased 6 percent year-over-year in fiscal 2013. That represents $9.2 billion, an 18 percent increase over the dollars approved during the same period a year ago. Approvals in the last two years have set Small Business Administration records.
Despite the positive reports, the general belief is that small businesses aren’t getting loans, which isn’t true, said Dee H. Burton, executive vice president of Alliance Bank of Arizona.
“Yes, small businesses can get loans now,” Burton said. “At Alliance Bank, we have always been actively engaged in lending to small business — and we never stopped lending even through the toughest times of the Recession.”
What about the perception that lending standards have changed or tightened? That’s another misperception, bankers said.
“General underwriting guidelines have not really changed over the years,” Burton said. “Unfortunately, the Recession has made it more challenging for businesses to qualify. For most businesses, a reduction in revenue may have resulted in a negative impact on cash flow or resulted in a more leveraged balance sheet. Further, the value of assets which banks often look to take as collateral — equipment, real estate, accounts receivable, etc. — are not at the levels they were pre-Recession. All-in-all, these factors have impacted small businesses’ ability to meet the typical standards under which banks underwrite business loans.”
While Lehmann said banks were more willing to bend on some of the fundamentals prior to the Recession, he said banks always look to cash flow, collateral, and capital levels to make a credit decision.
At Wells Fargo, Anderson said lending standards have remained consistent. Before the bank extends credit, it looks for a business to show:
* Steady cash flow. Cash flow is a key indicator of a business’ financial health and its future prospects. When it can show reliable cash flow, we can see it has the resources to repay new loans.
* Debt load is manageable. Banks want to make sure a business has the ability to take on additional debt and is in a strong financial position to manage its debt payments.
* Good payment history. Payment history provides an important record of its ability to responsibly pay down debt.
As for lines of credit for small businesses, Ward Hickey, business banking manager for National Bank of Arizona, said, “Small business lines of credit are based on business cash flow and collateral values. As both of these improve for small businesses in Arizona, the underwriting standards will ease and more small business lines of credit will be available.”
As the economy in Arizona continues to strengthen, bankers see a better environment for small business.
“We can point to a number of positive signs in small business lending,” Anderson said. “There is more small business activity in our stores, more small businesses are applying for credit, and loan delinquencies continue to decline.”
As businesses shift from survival mode to growth mode, the outlook for lending to small and medium-sized businesses — which Lehmann called “the life blood of the Arizona economy” — continues to be positive, which will help small businesses grow and add workers.
“Arizona will continue to be a growth state and businesses that have survived this Recession will be able to grow as the state continues to grow,” Burton said. “We see businesses are now investing in items such as new equipment and new expansion, which had been put on hold during the Recession. Businesses are also taking advantage of the current interest rate environment to fund their expansion.”
“As the economy continues to heal and grow,” he said, “so will the small businesses of Arizona.”