Changes

As a result of small banks' overall decline in activity, credit loaning to small businesses has taken a hit. Consequently, overall bank loaning to small business has fallen from its 2006 level of 60%. Projections from the Wall Street Journal have the current level pinned at about 40%, but the SBA claims that the figure is closer to 51%. Regardless of the actual number, it is clear that banks' share of small business finance has fallen at an alarming rate. Why? Well, there is limited quantitative research on this particular field. Instead, researchers have been proposing anecdotal theories to explain the stagnation in bank loaning. In a couple of sentences, large banks do not have a proper and comprehensive system of vetting the qualitative assets (non-balance sheet, credit rating) held by small businesses. Consequently, there is no reliable way to ensure that a small business could be a prudent debtor. Considering that banks can easily make loans to proven, solvent large businesses, there is little justification for making smaller investments in riskier assets. In other words, it is difficult to justify taking an additional risk for a smaller reward. Intuitively speaking, this makes sense. This perception of small businesses as inherently riskier than their larger counterparts is clearly evident in surveys conducted by the Harvard Business School, Small Business Finance Institute, Kauffman Foundation, and the Hartford. In each of these surveys, small business owners showed (at an average rate of just over 60%) that they were frustrated with the lack of available credit, and cutthroat competition among their peers to acquire loans. Meanwhile, most banks indicated satisfaction with the level of credit being extended to small business. A clear void has formed between banks and their small business debtors, and no evident solution currently exists.