Why Small Business Lending Is a Mess

After Ami Kassar was fired from his bankrupt company, Advanta, he founded MultiFunding.  MultiFunding helps small businesses get the best loans with the most favorable terms for their situations.  In his first post that appeared in The New York Times, he calls our attention to one of the factors why small business lending is a mess.  This refers to the definition of a small business.  The different borrowing institutions could not agree on what the revenue ceiling should be to be considered a small business.  Big banks consider those with $20 million or less revenue as small businesses; the Federal Reserve puts the ceiling at $50 million; while the Federal Deposit Insurance Corporation has it at $1 million.  This has brought confusion on small business loans statistics.

There are now loan products out there with annual percentage rates of 4 or 5 percent and others as high as 60 or even 80 percent. In part, this is the unintended consequence of the big banks’ tightening up their lending; that tightening created a vacuum that has been filled by a whole new world of alternative lending companies that have opened to take advantage of the situation. Many of these alternative lenders are backed by hedge funds that demand high returns.

Small-Business Lending Is a Highly Inefficient Market

Few owners have the time to investigate the ins and outs of the credit markets. If you type “small business loan” into Google, you will find a myriad of options but little help figuring out which ones make sense for your company’s particular situation.

Small-Business Lending Is a Confusing Mess

Why has there been so much less lending the last few years? Have the banks simply stopped making the too-risky loans they were making before the economic crisis hit? Did they overreact and stop making even sound loans to sound companies? Or did lending drop because after the recession, businesses started to retrench and their demand for credit declined? Did all banks stop lending or was it just the big banks?

One reason is that we can’t even agree on important definitions. The Small Business Administration reports on lending activity, but nobody knows what percentage of overall lending the S.B.A. accounts for. The big banks release their scorecards on small-business lending but they define small businesses as those with revenue of $20 million or less. For its reports, the Federal Reserve defines small businesses as having revenue of $50 million or less. For its reports, the Federal Deposit Insurance Corporation defines small-business loans as those with balances of $1 million or less. The merchant cash advance lenders and factors do not release reports at all.

Many Small Business Owners Are Still Reeling

Working capital is a fight. Banks are not easy to deal with, and fair loans are tough to come by.  …

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