Federal Reserve: Small Businesses Still Prefer Small Lenders
Mar 9th, 2016 @ 8:52 PM by Amber Nelson
U.S. small businesses found greatest acceptance and satisfaction with small (often local) banks, according to a recent survey from the Federal Reserve, although larger firms continue to be approved for loans much more often than small and startup companies.
The Fed’s 2015 Small Business Credit Survey found that “traditional bank lending continues to be the primary source of financing for small businesses. Credit applicants were most successful and most satisfied with their borrowing experience at small banks.”
Among those who applied for loans with small banks, 76 percent received loans for at least part of the requested sum, while big banks only doled out some funding for 58 percent of applicants. Customer satisfaction correlated with those numbers: 75 percent of customers were satisfied with their overall experience with small banks, but just 51 percent were satisfied with large bank interaction.
Online lenders provided financing in 2015 for many small business owners with 71 percent of applicants being approved for loans, but customers were rarely happy with the experience. A mere 15 percent of borrowers reported being satisfied, citing high interest rates and unfavorable repayment terms as their chief complaints.
Almost half (47 percent) of the 3,459 small businesses participating in the Fed survey applied for more credit in 2015 and roughly half of those received all the funding they requested while 18 percent reported not being approved for any financing at all. Among those who did not apply for business loan credit, 16 percent said they the reason they refrained was because they did not believe they would be approved.
Many of those were likely young firms without sufficient credit scores or collateral to obtain business funding. Unfortunately those firms (between zero and five years of age) are the most likely to need financing.
Still the overall small business picture seems to be recovering. More applicants reported “profitability and revenue growth” in 2015 than in the previous year’s survey, a good sign for the economy moving forward. “Financial performance is improving,” said Shannon McKay, a research manager at the Federal Reserve Bank of Richmond. “And we are seeing gains out of the recession in terms of financing for small businesses.”
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.