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When a microfinance organization started in Bangladesh is the only way some American entrepreneurs can get loans, what does it say about the state of banking in the United States?
The Grameen Foundation describes itself as “a leader in the fight against poverty in sub-Saharan Africa, Asia, the Middle East/North Africa and Latin America.” An offshoot of the foundation, Grameen America, a month ago opened a branch in Charlotte, N.C., the second largest banking center in the country, and has 10 other branches in the United States.
To be sure, those applying for microloans don’t have the background to apply for traditional ones. But even small business owners with good credit are having a hard time getting loans. Community banks aren’t the problem – it’s the majors, the same ones bailed out by American taxpayers a few years ago, who are to blame. This is a serious problem because small businesses employ more than 50 percent of those working in the United States. If they can’t get access to credit, it means fewer people will be hired and the tepid recovery will continue apace.
Television commercials from the country’s biggest banks make it look as if they focus on loaning to artists, bakers and independent retailers. As Bank of America said in a recent advertisement, “[W]e know the impact that local businesses have on communities. That’s why we extended $6.4 billion dollars in new credit to small businesses across the country last year. Because the more we help them, the more we make opportunity possible.”
And in September 2011, the country’s 13 biggest banks stood by Vice President Joseph Biden and the head of the Small Business Administration in Cleveland and pledged to loan $20 billion more out to small businesses over three years. This fall the group announced it had increased lending by $11 billion in the past year.
But don’t take the banks at their word.
First, the definition of a small business loan varies. To the banks, a loan to a company with up to $20 million in revenue is considered a small business loan. A better definition of a small business loan is one with a balance of $1 million or less, which the Federal Deposit Insurance Corporation (FDIC) measures.
According to FDIC data, lending in the $1 million and under category was down by $2 billion by those same banks during the time they said it was up $11 billion.
And as Stacy Mitchell of the Institute for Local Self-Reliance wrote in September, “Overall, the volume of small business lending at the nation's largest 18 banks has fallen 21 percent since 2009. But the picture is even worse when you consider that these banks have gained market share. As a share of their assets, small business lending at these banks fell 33 percent. The top banks now control 60 percent of U.S. bank assets, but provide only 27 percent of small business loans.”
Ami Kassar, CEO of MultiFunding, which advises small businesses on loan options, said part of the reason that banks don’t like to lend to small businesses is that they can make a lot more money on a $100 million loan than on smaller ones, which require the same paperwork and more people. Bureaucracies at large institutions also mean the borrower becomes a data point rather than a human being.
Making the situation worse is that regulations stemming from the Dodd-Frank financial reform bill of 2010 have increased the costs of lending for community banks.
All factors combined are pushing loan seekers to private lenders for money, said Kassar, whose company runs bankinggrades.com, a site that rates banks on their lending to small businesses. (Bank of America, by the way, earns an “F” from the site.)
Loans from private lenders put businesses on a “high-interest treadmill,” he said. There is no data on the amount of money that private lenders loan each year so it’s impossible to measure the size of their role.
Kassar recommends that policy makers define “small business loan” to make data more transparent and to prevent banks from making false claims. That would be a good start. But it doesn’t change the fact that American taxpayers were forced to bail out mega banks who increasingly won’t lend to even the most credit worthy of businesses not rich enough to hire a lobbyist to defend themselves in Washington.
Marta H. Mossburg is an independent columnist. Contact her at email@example.com.