Bank Lenders Push SMBs To Credit Cards And Alt-Lenders

Big banks are increasingly giving up their SMB loan market to alternative lenders who charge a remarkably high loan interest rate.

In 2014, the 10 largest banks lent $44.7 billion in SMB loans, a 38 percent decline from its $72.5 billion peak attained in 2006, a Wall Street Journal report found.

The change in banks’ attitudes towards SMB loans is widening the market for alternative lenders, who saw their market share jump from 10 percent to 26 percent. The shift is also forcing small businesses to rely on credit cards, which at an approximate 12.85 percent interest rate, offer a much cheaper alternative to online alt-lenders, some of whom charge as high as 80 percent.

According to payment consulting firm First Annapolis Consulting Inc., SMB spending on credit and charge cards will total $445 billion this year, more than two times the $230 billion observed in 2006, WSJ reported.

The shift in trend started from the post-recession period, which saw big companies settle on top of the loan approval list of banks, whereas SMBs fell down to the bottom. The largest banks “have essentially abandoned the small business market,” said DePaul University finance professor Rebel A. Cole in an interview with WSJ.

The root of the problem can be traced back to tighter lending standards imposed by banks on SMBs and weaker demand. However, the problem extends beyond that to poorer returns on loan value as compared to big companies.

“We all struggle to make money on the lending side,” Jay DesMarteau, head of small business banking at TD Bank, told WSJ. “It’s a lot of work to try and find these little companies, underwrite them and manage the book, when the units are high and the dollars low.”

While it continues to be troublesome for small businesses seeking loans from big banks, some of the bigger banks are now changing their lending process to provide for SMB loan needs. Wells Fargo and Capital One, for instance, are now partnering with nonprofit lenders who can provide loans to SMBs that do not fit the profile requirements for regular business loans these days.

Bank of America is yet another bank now reportedly offering SMBs a $10,000 to $100,000 credit line using a cheaper underwriting process that involves reviewing checking and merchant payment processing accounts rather than using the traditional method of looking into account statements and tax returns.