Growth Strategies

More Banks Saying Yes

A new survey shows smaller businesses are growing more likely to pursue and receive bank loans.
Alix StuartApril 22, 2011

An increasing number of small businesses are applying for — and receiving — credit from banks, according to a recent Greenwich Associates survey of companies with annual revenues of between $1 million and $10 million.

About 30% of small businesses applied for a loan in the first quarter of the year, up from 15% in the last quarter of 2010 and 5% the quarter before that, according to the survey. While approval rates fluctuated from quarter to quarter, on average about 60% of the small businesses surveyed got the credit they sought between March 2010 and March 2011.

Those results rival the trends for middle-market companies (those with between $10 million and $500 million in revenue), which typically seek and receive more credit than smaller ones.

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“This is the trickle-down effect,” with banks extending the favorable treatment they’ve previously shown larger companies to smaller ones as well, says Duncan Banfield, a consultant with Greenwich Associates, a research firm that focuses on the financial-services industry. Among the main reasons for the shift: banks have cleaned up their balance sheets and are ready to lend again, and some firms feel more comfortable about their future.

Still, a large portion of firms are not optimistic enough to seek additional financing. Nearly half of the small businesses surveyed said they are waiting to decide about pursuing bank credit until they have a better understanding of their company’s performance.

Finance executives responding to the quarterly Duke University/CFO Magazine Global Business Outlook Survey also indicated that the lending environment remains mixed. On one hand, 29% of executives at companies with under $100 million in revenues said they found borrowing easier in the first quarter of 2011, up from 18% in December 2009. Conversely, the percentage of executives saying they found borrowing to be harder in first-quarter 2011 was unchanged at 35%.

“Overall, borrowing conditions have improved, but unfortunately, there’s still this pocket of concern for the smallest companies,” says John Graham, professor of finance at Duke’s Fuqua School of Business and director of the Duke/CFO survey.

The lending that did occur mostly came from smaller banks, notes Banfield, with about half of the loans originating from outside the top 20 banks. Indeed, many smaller businesses have migrated to community banks after the larger banks pulled away from them during the financial crisis, and they are still harboring some resentment. “The big banks have to win back trust” before small businesses return to them, says David Heiner, an associate consultant at Greenwich Associates.

Ironically, increase in demand came absent much awareness of the government’s efforts to stimulate lending. About 85% of small businesses said they had not heard of or didn’t know much about the Small Business Lending Fund, a Treasury program designed to lower the cost of capital for community banks as their lending volume increases.

While the Small Business Jobs Act of 2010 had originally allocated $30 billion to the fund, more-recent budget estimates peg the actual demand for such funds as below that level, at around $17 billion. Banks have been reluctant to take the funds for fear they will not be able to make sufficient volumes of loans to keep the price down. So far, banks have applied for less than $10 billion, according to media reports, since the original deadline for applications was extended.