Smart Borrower Blog

Small Banks Struggling to Lend to Small Businesses

Mar 29th, 2010 @ 4:40 PM by Debbie Dragon

Many small businesses throughout the country are still finding it difficult to get approved for loans from the banks that have always, in the past, lent to them. Even businesses with perfect credit records and profits are being turned away. At the same time economists continue to say that our economic recovery depends on the growth of small businesses. The Obama administration has also stressed the importance of small business and has openly supported small business lending. So why isn’t small business lending happening?

An article in USA today reports on the struggle that is going on between small banks and what is holding them back from lending to small businesses. Banks across the country are claiming that they actually do want to lend more, but their hands are tied. Government guidelines and regulations are prohibiting them from lending money to small business owners. Small bank owners are complaining that government field examiners have tightened their guidelines for lending and that the banks are not able to take into consideration the familiarity that they have with borrowers in the approval process. While some borrowers truly do not qualify and their loans would be risky, other borrower’s that do not carry much risk are also being turned away.

Today, due to lending regulations, small business loans can be denied based on stress in the local community and the fallen value of business owner collateral, usually the borrower’s commercial real estate property. Banks also have to exceed past minimum levels for capital and have had to up their bad loan reserves. This leaves less money for them to lend.

While bank examiners do not approve or deny loans they do help control what the bank is able to loan. Even though Washington is pushing for more loans for small business owners it appears their regulators are part of the reason that more loans are being denied. While small business loans have dropped for a number of reasons, an informal survey done by ICBA showed that 52% of banks had decreased their lending due to recent examinations.

A former bank examiner, Rep. Blaine Luetkemeyer, R-Mo laid into banking regulators saying, “”We have this huge disconnect between what’s going on here in D.C. (and) what’s actually been going on out in the field,” he told them at a joint hearing of the House Financial Services and Small Business committees. “Quite frankly, you guys are part of the problem.”

About Debbie Dragon
Debbie Dragon is a full time freelance writer and the co-owner of

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