Amid Tight Credit, Businesses May Want to Turn to Small Banks for Loans

The New York Fed recently conducted a survey of more than 425 companies with less than 500 employees to gauge the current lending environment.  The poll found that of the nearly 60% that applied for credit, only half had received funding, despite previous borrowing success.

Some applicants denied credit could become viable borrowers via “second look” programs that a number of big banks announced that they would institute.  However, Biz2Credit co-founder and CEO Rohit Arora, an expert on small-business funding, believes a lot of posturing is going on.  He believes large lenders are telling applicants they will review applications but ultimately still turn down the loan requests. 

"In many cases, it is just a marketing ploy, The big banks are simply telling people what they want to hear while they continue to deny credit to small-business owners," Arora says.

"Executives from some of the larger banks maintain that there is a shortage of small businesses seeking credit.  This isn't a true reflection of what's going on in the economy," says Arora, whose company (visit is processing more than 3,000 loan applications monthly.

Arora's records indicate that borrowers are finding much greater success in securing funding from smaller lenders such as community banks, credit unions and micro lenders.  They are the ones that are actually providing capital to small businesses in this tight credit market, he says.

There are several reasons, he says:

  • Credit unions and community banks are local in nature, are more connected with the small businesses in their areas, and do manual underwriting.  Bigger banks, on the other hand, are more automated and thus are less flexible with regard to credit scores.
  • Community-based lenders understand issues related to low personal and business credit scores.  Thus, they are more understanding and less rigid about their funding parameters.
  • Smaller lenders' decision-making is quicker, and they are willing to provide more money as a business grows.  Many times, they can give better interest rates than the bigger banks.
  •  Smaller, community-focused lenders make money only by making loans.  They are not investment bankers and generate little revenue from anything other than loan-making.

Entrepreneurs seeking start-up funding or capital for expansion have a range of funding options at their disposal and can benefit from platforms, such as Biz2Credit, that can connect them with the capital needed to spur growth and stimulate job-creation.  

A number of lenders, such as Seedco Financial and ACCION, which help businesses in economically disadvantaged areas, and BNB Bank, among others, are providing significant funding to area businesses that otherwise might struggle to get credit.  This grass-roots nature of local lending is a rich alternative to the automated banking processes that are partly responsible for the recent economic downturn.