Many banks seem to be abandoning Main Street, while others are getting more engaged with small-business lending — one right here in Utah.
One of the consequences of the Great Recession has been the number of banks and bankers who have chosen to move upstream to bigger, and supposedly more profitable, business borrowers. There are reasons for the move, including the risky nature of small-business lending generally, the often under-collateralized nature of small-business loans, and the cost of underwriting and processing the smaller loan amounts typically associated with lending to Main Street.
Although Main Street provides two out of every three new jobs and employs half of the U.S. workforce, the smallest small businesses, the Main Street-type businesses you and I identify with, are starving for capital to grow, expand and hire.
What does "too risky" really mean?
Yes, small businesses fail and small-business lending includes a certain amount of risk. Admittedly, if I were a banker, I would likely agree that it makes a lot of sense to move upstream and look for bigger and potentially more reliable borrowers, like maybe Sears?
Charles Green, writing for the industry newsletter Coleman Report, recently reported that Sears Holding Company (what’s left of the struggling retailers Sears & Roebuck and K-Mart) is meeting with lenders this month to ask for a $1 billion loan. “Nobody laughed,” writes Green.
Despite the fact they have lost sales for the last 26 quarters (the most recent three-month losses at $200 million), Sears Holding Company will likely get a very different reaction than a similarly struggling Main Street business owner would receive. In other words, Sears likely will get the loan.
The financial meltdown that initiated the biggest economic disaster since the Great Depression taught us nothing if failing enterprises like Sears can access capital and small businesses poised to grow cannot. The prospect of bankers throwing good money after bad by lending to Sears just blows my mind.
Nevertheless, I can see how the numbers might turn a banker's head. According to the Sears Holding Company’s 2012 annual report, it had revenues of a little over $39 billion and at the publishing of the 2012 report had 2,548 retail stores — in other words, it has a little bit of collateral. Not to mention it has been around since 1893.
Respectable annual revenue? Check. Enough time in business? Check. Collateral? Check.
I’m sure the bankers will look at the last six years of lost sales and financial losses, but I’m just as confident that someone will suggest that Sears is just too big to fail. “Sears is an American institution,” they will say. “They’ve been around since 1893. Utah wasn’t even a state then.”
When the banking industry says it has an aversion to risk, and suggests that small-business owners just aren’t fundamentally credit worthy, I wonder what it is that makes the risk associated with lending to Sears and its horrible business fundamentals attractive?
- It has been losing money for years
- It can’t keep a management team
- It is shutting down stores
- Neither brand is what it once was
The broken system that handicaps small business borrowers
Although there are other sources of money for small business, community banks have an opportunity to make more capital available to Main Street, stimulate their local economies and create local jobs. They just need to make the choice to do so — as some of their colleagues are doing right now.
Part of the challenge is making the choice to adapt to the types of loans Main Street needs. And you might be surprised to know that it’s not because they want too much, it’s because they don’t want enough.
Many of the small-business borrowers that get turned down at the bank, to the tune of thousands every week, visit Lendio looking for a small-business loan. Of them, 59 percent are looking for loans of $50,000 or less, far less than the average SBA 7(a) loan last year of $337,000. So far this year, the average is $379,274. Part of the reason is the cost associated with initiating and underwriting a smaller loan.
Who can blame a banker for ignoring the Main Street business owner who wants a $25,000 loan or a $50,000 loan when it’s just as costly to initiate and underwrite as a $500,000 loan? Traci Flynn at Holladay Bank & Trust, for starters.
Holladay Bank & Trust
In the spirit of full disclosure, Holladay Bank & Trust is one of the hundreds of small business lenders on the Lendio platform, but that’s not why I’m talking about it. I really believe it is trying to make access to capital a little easier for the small businesses in its community.
Holladay Bank doesn’t have a national footprint. In fact, it doesn't have branches all over the state, or even the city for that matter. Its focus is the Holladay community. It only has one branch, and it’s been that way for the last 40 years.
I recently spoke with Traci Flynn, a vice president at the bank, and asked what made the bank different. She said, “We work with a lot of small business owners who have good, healthy businesses, but aren’t perfect. They might not meet the restrictive standard of norms and requirements set by the bigger small business lenders in our area, but have proven to be great small business loan customers.”
When pressed a little further, she shared some of the criteria they use at Holladay Bank in addition to credit score, time in business, annual revenue and collateral.
Character and history
The last few years have been tough for everyone. When evaluating a potential loan, Flynn wants to know if the business has a good management team, is it current with its monthly obligations, does it have a good product, is it competing well within its market? Sometimes these indicators can mitigate a less than perfect credit history.
“With a good management team and some of these other factors in place, we can make a case to the lending board that the business is a good candidate for a loan,” she said. “Of course there is a credit score threshold we won’t go below, but we want to make sure we’re doing the best we can for all the small businesses in our community.”
It appreciates what it’s like to be a small business
“Although we do a lot of bigger small business loans, I’m just as happy to help the small business owner who is looking for $50,000. To a lot of the businesses in our community, that’s a big loan,” she said. “We understand what it’s like to be the little guy — in some respects, we’re the little guy too."
Holladay Bank understands the costs associated with smaller small-business loans, but it also understands the importance access to capital means to the business owners in its community. They’re making a long-term investment in Holladay.
Speaking of paperwork and the costs of a small business loan
It’s not uncommon for the months-long approval process to take its toll on a small business owner. What’s more, “Most banks are six weeks out before they’ll even talk to you about an SBA loan,” said Flynn. “Instead of sending the 20-page packet and wishing them luck, I try to meet with potential borrowers right away. Instead of expecting the small business owner to plow through a bunch of unfamiliar documents, I digest their financial statements and other documents and start the SBA forms myself. That way, the next time we meet, we can fill in the blanks and try to shorten a very lengthy approval process.”
Community lending decisions are made in the community
Of course this is problematic for bigger banks, but the approval process begins and ends within the walls of a single Holladay Bank & Trust office. Everyone involved is under one roof, part of the same team and invested in helping the small business community in their community.
Of course Holladay Bank & Trust might be on the smaller end of the small business lending continuum, but I think it is on to something. Collectively, small business makes a big difference in the economy. Flynn argues there are other bankers just like her all across the country. Small-business owners just need to look for them.
Access to capital is one of the biggest challenges faced by Main Street. I’d love to hear from other lenders who are helping the Main Street business owners in their community.
As a Main Street business evangelist and marketing veteran with more than 25 years in the trenches, Ty Kiisel writes about leading people and small-business issues for lendio.com.