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→Slimming Credit Availability
Despite the significant credit rating deduction incurred by the recession, small businesses have been able to find loans from alternative sources. Traditionally, smaller banks have catered to small businesses unable to qualify for loans from institutional investors, or bigger banks. In 2010, small and community banks accounted for 48.1% of all small business bank loans, according to the Mercatus Center at George Mason University. Consequently, small businesses have a vested interest in the well-being of their community banks. Unfortunately for small business, these community banks are disappearing at alarming rates. Small banks have, since 1993, seen their total numbers fall by almost 50%. In 1993, over 11,000 banks were around. Nowadays, that number is closer to 6,000. These dramatic decline could be accredited to a few things. Primarily, it appears that many small banks simply cannot compete, and have dropped out of the market. A Mercatus Center report shows that small banks' share of the domestic deposit market fell by 50% (from 40 to 20%) in the last 15 years. Meanwhile, the largest 5 banks have "picked up the slack" and acquired a current portion of 39.6%, contrary to their 19% holding in 2001. Beyond that, small banks' total assets have been halved since 2000, and don't show signs of improving. Smaller banks with consistently profitable operations have been acquired, so as to accommodate for higher regulatory costs, search costs, and transaction costs. In a nutshell, it is a difficult time for small banks. Trends indicate that consolidation is the most feasible route to maintain solvency in today's credit market.
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. While alternative methods of financing (crowdfunding, online platforms for fundraising, and online term loans) have arisen in the wake of this "credit crunch", they still represent a drop in the bucket. Moreover, these alternative methods are widely unregulated, and are likely to undergo significant changes before they can be deemed as "mainstream" sources of capital generation. In the meantime, small businesses are looking beyond the banking system for a solution.
