Small Business Lending

Lending to small enterprises

Financing of small businesses, lending, financing and financial assistance. Fourth Annual General Meeting of Financial Institutions (FDIC) publishes small business lending scoreboard The FDIC published a FDIC Small Business Lending Results Review on 1 October. In order to analyse the lending behaviour of small businesses in each bank, the study examined the replies of some 1,200 of them. Subjects covered include total lending to small businesses, type of borrower, markets and conditions, competition practice and benefits, and subscription practice.

In particular, the paper concluded that (i) small business lending by small firms is higher than currently reported, as many firms provide more than $1 million in corporate and industry loans; (ii) small and large firms list face-to-face relations as their biggest competition edge in the open markets and many are willing to make exemptions from subscription policy on the basis of their relationship; and (iii) small firms are usually local in nature, as very few firms take small business loans on-line.

The next big thing is why alternative lending to small businesses is so important.

In recent years, the credit environment for small businesses has changed drastically following the Great Depression, and more small entrepreneurs are looking for alternative ways for small businesses to obtain the working equity they need. The shortage of credit from banks creates a loophole in lending to small enterprises, for which alternative lending to small enterprises has emerged.

A number of determinants are pushing the increase in alternative lending to small businesses. First, many small MFIs left the business after the 2008-2009 turmoil, and many larger MFIs limited their lending to small businesses. These are some of the main driver behind the deceleration in lending to small businesses and the increase in alternative lending to small businesses:

University of North Carolina Business School's Ted Zoller was cited in the Wall Street Journal when he said that although more small business holders are seeking credit, the big banking groups have been slowly returning to lending to small companies, in part because of higher regulation demands that have been placed as a consequence of the global economic downturn.

Unfortunately, most of the available leverage is with large corporate banking institutions that have been hard hit by the global credit crunch and now face significant barriers to assessing creditworthiness," said Mr. Zoller. However, the credit crunch has also been a major factor in the recent economic downturn. Excessive focus on large credits has left a financing shortfall in which many small entrepreneurs are looking for smaller sums of credit, often difficult to obtain from conventional credit institutions.

Big-bank lending may not appear to be interested in smaller business lending, but this is not the case with the increasing number of alternative ways of lending to small business. Existing on-line financiers and start-ups such as Plattform Financiers, P2P Financiers, Place Finance Providers and others give small business proprietors new opportunities that were not possible just a few years ago, and this new way of lending is made possible by technology innovations.

Large commercial banking companies will not leave any time soon, but it seems that a significant shortfall has arisen in the credit markets between the amount of credit that many small business proprietors need and the amount of credit that commercial banking companies are most interested in issuing. Consequently, there has been an increase in alternative lending to small businesses to fill this mismatch.

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