The Current State of True “Small Business” Lending

Last month, a subcommittee on Economic Growth, Tax, and Capital Access held a hearing titled, ”Where Are We Now? Examining the Post-Recession Small Business Lending Environment.” As I listened to witnesses explain to our policymakers the current state of small business lending in our country, I realized just how deep the REAL problems are.

For banks, compliance and regulation are staggering, making it cost prohibitive for them to make “small loans to small businesses.” I quoted that because I agree with the CEO of Dun & Bradstreet, including his comment that we need to all ”get on the same page” when it comes to the definition of small business. Look up the SBA’s definition and you’re labored down by employee count, NAICS Code lists, annual revenue standards by SIC code, etc.

When most of us think of a ”small business,” we think of the dry cleaner or coffee shop down the street, or that favorite lunch spot. We don’t think of a small business as a manufacturer that distributes products to 14 different countries or the wholesale auto parts company that distributes warehouses of parts to thousands of smaller stores. There’s a marked difference in the definition of a small business to banks and the perception of it to the rest of us. To a bank, a ”small business loan” can be $250,000 to up into the millions. But to many people, a small business loan is more in the neighborhood of $30,000 for inventory or $20,000 for a new piece of equipment. In the banks’ defense, they just can’t make money on a loan that size. In fact, I’d estimate that with the cost of compliance and the manual process a bank goes through to underwrite commercial loans, they can’t charge the truly small client enough to make back their cost.

Compounding this problem are bank acquisitions. Bank consolidations mean the balance sheets and deposit totals have gone up. By extension, this means to be ”meaningful,” loans to small businesses have to be LARGE ones. A bank would much rather make ten $1 million dollar loans than process, underwrite, close, and service 400 $25,000 loans. Wouldn’t you? It’s much more cost-effective. Just to close 400 loans you’d probably have to underwrite and process 2,000 applications or more!

On the flip side of this, think of IOU Financial. We  leverage technology to go through those 2,000 applications. We then automatically filter those 2,000 applications down to a manageable 800, and then close 600 of those requested loans. We’ve reduced the process from 14 touches and 45 days down to four touches and four days. All of this enables efficiency and allows us a scalable way to deploy capital to true small business owners via the internet. This is exactly why we’re continuing our rapid growth. We know that the real small business owners need capital to grow and to thrive, which is why we’re here. We’re successfully fulfilling a need that traditional banks are currently not able to.