SBA Loan Problems: Barriers to the Small Business Loan Market

We provide individuals who are facing an SBA loan default with solutions. We will analyze your SBA loan problems and advise you on potential solutions such as an SBA offer in compromise.

Dealing with the idea that you might be facing an SBA loan default can be terrifying. The SBA attorneys in our office are skilled at helping clients understand all the facets of their situation. We will advise you as to the potential for an SBA offer in compromise. You should never face your SBA loan problems alone. It is important to retain the services of an attorney who can help you through this difficult time in your life. Please contact us for a consultation.

Structural barriers  appear to be holding back bank lending to small businesses.

A long move toward consolidation of banking assets into less and less banks is denying a key source of capital for small firms. Community banks are being consolidated by big banks, with the number of community banks dropping to fewer than 7,000 today, a decrease from over 14,000 in the mid-1980s, while average bank assets continues to rise. This trend was made even greater by the financial crisis.

Additionally,  the costs of borrowers and lenders matching up is very high.   It is difficult for qualified borrowers to find willing lenders, and vice versa. Federal Reserve research finds that small-business borrowers can spend almost 25 hours on paperwork for bank loans, and are often submitting applications to multiple banks. Successful applicants wait weeks or, in some cases, a month or more for the funds to actually be approved and made available.

Furthermore, small-business loans, usually loans below $1 million, are considerably less profitable than large business loans for several reasons, including: Small-business lending is riskier than large-business lending. Small businesses are much more sensitive to swings in the economy, have higher failure rates, and fewer assets to collateralize.

Determining creditworthiness of small businesses can be hard due to a lack of transparent information. Little, if any, public information exists about the performance of most small businesses as they are not subject to disclosure and securities laws like larger borrowers. Many small businesses also fail to keep detailed balance sheets, use bare bones tax returns, and keep insufficient income statements. Community banks have historically placed more importance on relationships with borrowers in their underwriting processes, but these relationships are expensive and have not in the past translated well to automated methods for assessing creditworthiness, which are favored by larger banks.

Transaction costs to process a $100,000 loan are similar to a $1 million loan, but with less profit. As a result, banks are less likely to do business  lending at the smallest dollar level. Some banks, particularly larger banks, have significantly reduced or eliminated loans below a certain threshold, typically $100,000 or $250,000, or simply will not lend to small businesses with revenue of less than $2 million, as a way to limit time-consuming applications from small businesses. This creates a problem in the market as over half of small businesses are believed to be looking for loans of under $100,000, leaving a large gap in the small business loan market. Often times, the biggest banks refer small businesses below such revenue thresholds or seeking such low dollar loans to their small business credit card products, which earn higher yields.

As the economy chugs along in its slow recovery from the recession, it appears unlikely that all the barriers to bank lending to small business will disappear. If you are in danger of falling into an SBA loan default, please contact us for a case evaluation.