SMB Underwriting Slowed As Demand Fell Off At The End Of 2017

Small businesses (SMBs) seeking loans decreased at the end of 2017, and companies felt the sting of financial challenges more acutely. Financing of all sorts was on the downswing, and SMB owners began dipping into their own piggy banks before seeking a lending agreement.

That finding comes care of data gathered by 12 regional Federal Reserve banks in a survey conducted over the third and fourth quarter of 2017. Overall, demand for financing was down, with only 40 percent of firms seeking funds — a 45 percent decrease from the year before.

Among the 8,100 companies surveyed, 64 percent reported facing some form of fiscal difficulty during that period. For 40 percent, the challenges came from paying operational expenses, while 30 percent said securing credit was a pressing issue.

The biggest struggles — perhaps unsurprisingly — were seen among new firms with revenue of $100,000 or less per year. Those firms also saw the highest rates of turning to personal cash to close various gaps in funding, at 67 percent.

Among those who sought credit, 48 percent looked to larger banks for funds, while 47 percent turned to smaller banks. Nearly a quarter — 24 percent — turned to online lenders, while 18 percent took loans from auto to equipment dealers directly. Relatives, friends and non-profits were also listed as sources for funding.

Firms applied for funding from multiple places, which is why the above figures add up to more than 100 percent.

While the lull is notable, there are signs credit is starting to flow more easily to SMBs. The data indicates firms that applied were more successful in securing funds than they were in 2016 — with 46 percent of applicants getting an approval (as opposed to 40 percent at the same time at the end of 2016). Among those with loans, 58 percent of credit and loan applications were approved for the full amount of funds requested — an increase of over 53 percent a year before.

There are hopes that with the recent rollback in some of the more stringent provisions of the Dodd-Frank Act more lending to SMBs may be on the horizon, as small lenders are increasingly able to make those loan offerings. The Economic Growth, Regulatory Relief and Consumer Protection Act loosened some of the regulations on small financial institutions, including community banks whose customers included many small businesses.

SMB lending has seen a massive hit over the last decade — partially caused by provisions in Dodd-Frank passed in 2010, which small banking advocates said pushed banks out of their traditional markets, like SMB lending, and pushed some small banks (that could not keep up with the new regulatory regime or its myriad costs) out of business entirely.

In the 10 years following the financial crisis, the U.S. lost more than a quarter of its community banks, according to the Federal Deposit Insurance Corp.

The new law “lifts inappropriate requirements and red tape from smaller financial institutions, which, in turn, will improve lending to small businesses,” said Karen Kerrigan, CEO of the Small Business & Entrepreneurship Council.

U.S. Chamber of Commerce President Thomas Donohue also praised the new law, saying it “will help restore access to financing for Main Street.”

In other good news for SMBs, the government met its goal of awarding at least 23 percent of federal contracting dollars to small businesses, according to new data from the Small Business Administration. That marks the fifth year that the government has hit the 23 percent goal set by Congress.

Veterans surpassed the set goal of 3 percent for firms owned by veterans disabled while serving in the military; 4.1 percent of contracting dollars went to those companies. Small, disadvantaged businesses received 9.1 percent of contracting dollars, which came in well over the set goal of 5 percent.

Not all goals were hit, however. Female-owned businesses missed their goal of 5 percent, hitting only 4.7 percent for the second year in a row.