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January 26, 2010

Need facts to make the case for small business lending? Why, Who and When

In case you are talking with an elected official or community leader who needs facts to support the anecdotal evidence, here are some facts gleaned from a recent article, For Want of a Loan, in The Economist:

  •    Small businesses (firms employing 500 workers or fewer) have accounted for 64% of net new job creation over the past 15 years
  •    A recent economic study found that cities with more small firms have done better at creating jobs over the past 20 years.
  •    The very small, with fewer than 50 workers–employing almost one-third of working Americans–have suffered around 45% of the job losses of the downturn.

The case for support of community banks:

At a congressional hearing on small business and the economic recovery in early 2009, economist Paul Merski, of the Independent Community
Bankers of America, a Washington (D.C.) trade group, told lawmakers
that community banks make 20% of all small-business loans, even though
they represent only about 12% of all bank assets. Furthermore, he said
that about 50% of all small-business loans under $100,000 are made by
community banks.

As to the impact of the recession on community banks and small business lending, The Economist says:

  •    Nearly 40% of outstanding small-business loans are held by banks with the greatest exposure to commercial-property risk.
  •    In 1993, the figure was only 11%.
  •    As commercial-property losses grow, those banks may be forced to curtail lending.

Credit Unions are also poised to fill the gap:

Another source of small business lending is the increasing availability of member business loans from credit unions. About 1/4th of credit unions currently provide them and they account for a very small percentage of business loans from all financial institutions.

Should the legislation currently being considered pass (HR 3380)

  • The limits on credit union member business lending would increase from about 12% to 25% of the credit union’s total assets
  • The loan amount that is considered a business loan would increase from $50,000 to $250,000.
  • Loans to religious non-profits would not count in the total.

Without the commercial property risk of many community banks, credit
unions that have the expertise and the capital are in line to help fill
the small business lending gap. That ability will be strengthened should the legislation pass.

Demand first…supply second:

Business needs to pick up before businesses as a group will want to borrow. When that happens, the big challenge won’t be whether there is money to lend. It will be how to qualify a borrower when their recent historical financial information does not support the loan.


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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.

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