Who is Financing Small Businesses?

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Who is Financing Small Businesses?

Jul 15, 2013

(Posted By: Javan Porter) The SBA’s Office of Advocacy annually publishes a report that tracks lending to small businesses. The report shows how small businesses are financed, or in the worst case, denied the financing they need. This could be the banking industry’s worst nightmare. Small businesses are too important to the economy to be heckled by lenders. This analysis provides the critical answers on how much they are heckled and why.

The 2012 report revealed that small business loans are declining as business loans in general are increasing. This is a testament of the current lending environment and a great tool for advocates to pursue. Lenders with total assets between $1 billion and $10 billion makeup just 39.3% of the small business loans, but they represent 53.3% of the decline is small business lending. The smaller lending institutions are becoming more cautious in regards to small business lending. The discrimination starts not on a personnel level, but in a credit scoring model that skews the answer away from smaller firms.

The difference between small business lending and business lending in general is growing by the year. Small business loans outstanding decreased by 3.1% while large business increased by 12%. The lending institutions are lending money to larger firms, because they are scared of their preconceived dangers of financing small businesses. As time has proven, the larger firms are susceptible to corruption and failure, but they are not judged as harshly in the credit scoring model. The importance of adequate financing for small businesses is too great to ignore such discriminatory practices. 

The path to fix this problem is not devoid of obstacles. A step policy makers could take would be to change the credit scoring models that discriminate. This would allow for smaller businesses to qualify for lending thus improving the economy. The effect small businesses have on the economy is far superior to that of the lending institutions. Its time our representatives understood and advocated for useful lending practices.  

Courtesy of NASE.org