Post-Crisis Financial Lending – Lessons Learned

During the financial crisis between the years of 2009 to 2011, most small business were negatively affected. Small businesses tend to take out lines of credit with a bank, and since the banks were suffering, so too did small businesses. Additionally, as banks closed, small business loans were adversely affected by these closures, as community banks and other small banks typically provided the most loans to small businesses.

A recent study by the U.S. Small Business Administration Office of Advocacy analyzed the period of time after the financial crisis, looked at any changes made in small business lines of credit from banks, and broadened the scope to also review lending to any size business. The purpose was to see if bank lending to small businesses reached the pre-financial crisis levels. In fact, before the financial crisis, small business loans typically grew by double-digits, but the advantage to growth went to small bank loans; loans taken from large banks only grew about half as fast. Of note, in this study, a small business loan is defined as a loan that is less than $1 million. Here’s an overview of the study results.

• New loans abruptly declined during crisis; small banks encouraged loans after crisis. During the financial crisis, large banks saw an abrupt decline of new loans compared to small banks. After the crisis, small banks were responsible for a fast growth in small business lending compared to large banks.
• Troubled banks didn’t lend much before, during or after the crisis. Troubled banks saw a typical growth of three percent/year before the crisis, which raised to about five percent/year during the crisis. However, after the financial crisis, small business lending from troubled banks only grew about two percent/year.
• Small business loans dropped during the crisis, without much recovery afterwards. Small business loans decreased by more than half during the crisis; during the recovery process, new small business loans are still down 40 percent.
• Loans from large banks and troubled banks are still small post-recovery. While total business loans have recovered most of their losses since the financial crisis, small business loans are still struggling to recovery to pre-financial crisis levels.

With that data in mind, there are some things that banks of any size and health can do to promote small business and large business loans after the financial crisis. Some policy recommendations by the study authors are as follows to encourage more small business lending:

• Support large banks to provide more small business loans via current laws, such as the Community Reinvestment Act.
• Promote the creation of community banks, as they tend to dedicate themselves to small business lending.
• Encourage non-bank lending growth for small businesses. For example, turn to U.S. credit unions and increase the small business loan limits currently in place.
• Reform the banks. This includes rapidly addressing issues with troubled banks, ensuring that the concentrations within the banking segment is limited, and also lifting minimum capital ratios.

Perhaps the biggest impact for small business lending following the financial crisis was the rise of alternative lending companies, allowing business owners to apply for a loan in minutes and receive funding in hours (instead of days or months) to put cash back into his or her business and use it for business marketing & promotion, expansion, or even equipment upgrades.