Here's another report from Advocacy on the effects of banking consolidation on small business lending and, in light of the trends, the news is ominous
The U.S. Small Business Administration has been gleefully breaking its own lending records every year for the past several years and might be forgiven for thinking they've made a significant dent in the problem of small business access to capital.
Yet, small business owners continue to consistently cite access to capital as one of the most important obstacles they face. And this is particularly true for startups, young microbusinesses, woman-owned small businesses, and rural enterprises.
All of which makes the findings in a new research report released last week by the SBA's Office of Advocacy both timely and ominous.
The report, entitled The Effects of Mergers and Acquisitions on Small Business Lending by Large Banks, is another chapter in Advocacy's ongoing research into the topic. But, while other studies have focused on the effects of mergers and acquisitions on small banks and their small business customers, this report focuses its attention on larger banks.
It's an important area for focus. As the researchers point out, the combined effects of deregulation and technological advances have spawned a great deal of consolidation in the banking industry. And this activity is likely to continue. As these larger banking companies come to represent an ever increasing share of U.S. banking assets, it is increasingly important to document the effects of this activity on small business lending.
Not too surprisingly, bank holding companies tend to do less small business non-credit card lending as they get larger. Both internal growth and acquisition-based growth had negative impacts on small business access to capital.
On the other hand, the report also found that when larger banks acquire smaller ones but do not merge them into the larger company, the effect on small business lending tends to be negligible. So, concentration of banking operations has a greater impact on small business lending than the mere change of hands in bank ownership.
If this trend in banking industry consolidation continues as the report's authors suggest, while small businesses continue to get smaller and younger, one wonders whether it will become even more difficult for those microbusinesses to gain access to capital and, if so, how much more difficult will it become?
Interestingly, the folks at Advocacy did not seem to find the results of this report as alarming as I did. "Financial innovation and deregulation are changing the services banks offer to their small business customers," said Thomas M. Sullivan, Chief Counsel for Advocacy, in a press release.
"Many of the changes have been positive and have opened up capital markets to more firms. Others are changing the relationship between what were once local banks and their customers. This study reports on one aspect of those changes and provides sound insight into the evolution of small business lending by banks," he added.
Nevertheless, this report in tandem with the explosive growth of microbusinesses over the last decade would seem to suggest that the capital market for many of those newer small businesses is not getting any friendlier. So, given recent changes to some of the SBA's lending programs, agency administrators might rationally wonder if its programs and services are truly meeting the capital-access part of its mandate, annual record-breaking notwithstanding.
It is one thing to say that the SBA guaranteed over 8.5% more loans in fiscal 2004 than it did in fiscal 2003. But that statistic does not answer an even more fundamental question. If SBA-backed small business lending is reaching less than 1% of the small business population, what percentage of small business owners need financing but still cannot find it, even from the SBA?
Similarly, the agency's representatives from Administrator Barreto on down are in the habit of seeking feedback from the SBA's existing clients in order to improve services. And that is a very good idea, too. But they also need to seek out those small business owners who are not SBA clients to get their feedback as well.
At the moment, everyone I've ever spoken to on the subject assumes that small business owners who don't seek out help from the SBA simply don't know about the SBA. That is an incomplete picture. Among other things, there is a segment of the microbusiness population that doesn't make use of the SBA's lending services because those services simply do not meet their needs.
For that matter, it might be instructive if someone surveyed microbusiness owners to find out what lending services would meet their needs in their own version of the best of all possible capital access worlds. Such an investigation might lead to the discovery that some SBA offerings need to be retooled to better serve the stated target market. A bit of market research definitely seems to be in order here.
The SBA's representatives also like to point to the growth in 7(a) lending in recent years as proof that they've got it right. This report illustrates just one aspect of the myriad reasons why the SBA's successes in recent years should not make either the agency, or the relevant legislators, complacent.
No matter how you slice it, the problems that small business owners have always had with respect to the issue of access to capital are far from being solved and, while the numbers show an increase in service delivery, they don't show that increase has kept pace with the incredible growth in microbusiness numbers over the same period. There are still vast numbers of microbusinesses that remain unserved by SBA loan programs altogether, and that should be a matter of concern to everyone.
The U.S. Small Business Administration has been gleefully breaking its own lending records every year for the past several years and might be forgiven for thinking they've made a significant dent in the problem of small business access to capital.
Yet, small business owners continue to consistently cite access to capital as one of the most important obstacles they face. And this is particularly true for startups, young microbusinesses, woman-owned small businesses, and rural enterprises.
All of which makes the findings in a new research report released last week by the SBA's Office of Advocacy both timely and ominous.
The report, entitled The Effects of Mergers and Acquisitions on Small Business Lending by Large Banks, is another chapter in Advocacy's ongoing research into the topic. But, while other studies have focused on the effects of mergers and acquisitions on small banks and their small business customers, this report focuses its attention on larger banks.
It's an important area for focus. As the researchers point out, the combined effects of deregulation and technological advances have spawned a great deal of consolidation in the banking industry. And this activity is likely to continue. As these larger banking companies come to represent an ever increasing share of U.S. banking assets, it is increasingly important to document the effects of this activity on small business lending.
Not too surprisingly, bank holding companies tend to do less small business non-credit card lending as they get larger. Both internal growth and acquisition-based growth had negative impacts on small business access to capital.
On the other hand, the report also found that when larger banks acquire smaller ones but do not merge them into the larger company, the effect on small business lending tends to be negligible. So, concentration of banking operations has a greater impact on small business lending than the mere change of hands in bank ownership.
If this trend in banking industry consolidation continues as the report's authors suggest, while small businesses continue to get smaller and younger, one wonders whether it will become even more difficult for those microbusinesses to gain access to capital and, if so, how much more difficult will it become?
Interestingly, the folks at Advocacy did not seem to find the results of this report as alarming as I did. "Financial innovation and deregulation are changing the services banks offer to their small business customers," said Thomas M. Sullivan, Chief Counsel for Advocacy, in a press release.
"Many of the changes have been positive and have opened up capital markets to more firms. Others are changing the relationship between what were once local banks and their customers. This study reports on one aspect of those changes and provides sound insight into the evolution of small business lending by banks," he added.
Nevertheless, this report in tandem with the explosive growth of microbusinesses over the last decade would seem to suggest that the capital market for many of those newer small businesses is not getting any friendlier. So, given recent changes to some of the SBA's lending programs, agency administrators might rationally wonder if its programs and services are truly meeting the capital-access part of its mandate, annual record-breaking notwithstanding.
It is one thing to say that the SBA guaranteed over 8.5% more loans in fiscal 2004 than it did in fiscal 2003. But that statistic does not answer an even more fundamental question. If SBA-backed small business lending is reaching less than 1% of the small business population, what percentage of small business owners need financing but still cannot find it, even from the SBA?
Similarly, the agency's representatives from Administrator Barreto on down are in the habit of seeking feedback from the SBA's existing clients in order to improve services. And that is a very good idea, too. But they also need to seek out those small business owners who are not SBA clients to get their feedback as well.
At the moment, everyone I've ever spoken to on the subject assumes that small business owners who don't seek out help from the SBA simply don't know about the SBA. That is an incomplete picture. Among other things, there is a segment of the microbusiness population that doesn't make use of the SBA's lending services because those services simply do not meet their needs.
For that matter, it might be instructive if someone surveyed microbusiness owners to find out what lending services would meet their needs in their own version of the best of all possible capital access worlds. Such an investigation might lead to the discovery that some SBA offerings need to be retooled to better serve the stated target market. A bit of market research definitely seems to be in order here.
The SBA's representatives also like to point to the growth in 7(a) lending in recent years as proof that they've got it right. This report illustrates just one aspect of the myriad reasons why the SBA's successes in recent years should not make either the agency, or the relevant legislators, complacent.
No matter how you slice it, the problems that small business owners have always had with respect to the issue of access to capital are far from being solved and, while the numbers show an increase in service delivery, they don't show that increase has kept pace with the incredible growth in microbusiness numbers over the same period. There are still vast numbers of microbusinesses that remain unserved by SBA loan programs altogether, and that should be a matter of concern to everyone.
