Author Topic: Why Small-Business Lending Is Not Recovering  (Read 7651 times)

AnilG

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Why Small-Business Lending Is Not Recovering
« on: August 04, 2014, 04:14:44 PM »
Interesting article from former head of US SBA  http://hbswk.hbs.edu/item/7595.html

Opportunity for P2P Lending

Key Takeaways

  • Income of the typical household headed by a self-employed person declined 19 percent in real terms between 2007 and 2010
  • small business credit scores are lower now than before the Great Recession
  • Regarding points of access to capital, community banks have long been crucial to small business lending. But community bank failures have been high and few new ones have started up.
  • search costs in small-business lending are high for both borrowers and lenders. It is difficult for qualified borrowers to find willing lenders, and vice versa.
  • Some banks are even refusing to lend to businesses within particular industries (for example, restaurants) or below revenue thresholds of $2 million.
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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Lovinglifestyle

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Re: Why Small-Business Lending Is Not Recovering
« Reply #1 on: August 04, 2014, 04:58:58 PM »
Thank you for taking the time to provide us with this summary and article link. 

The LC small business purpose loans don't bother us with having to make any decisions about what industry they're in.  Seeing one smart borrower claim "Art Framer" as a job title today was a refreshing exception.

Sean Hannity is advertising Prosper heavily in the afternoon--that's good to hear.  Small business needs more access to lending, for sure.

 

Ran

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Re: Why Small-Business Lending Is Not Recovering
« Reply #2 on: August 04, 2014, 06:18:11 PM »
Thank you for taking the time to provide us with this summary and article link. 

The LC small business purpose loans don't bother us with having to make any decisions about what industry they're in.  Seeing one smart borrower claim "Art Framer" as a job title today was a refreshing exception.

Sean Hannity is advertising Prosper heavily in the afternoon--that's good to hear.  Small business needs more access to lending, for sure.
Agree. LC has to do a lot more of underwriting business loans, including higher loan limit, evaluating business risk(not merely personal credit risk) and asking for detailed documents(again, business owner should not and will not mind to provide full documentation, which is different from personal loans)

Fred93

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Re: Why Small-Business Lending Is Not Recovering
« Reply #3 on: August 04, 2014, 06:47:55 PM »
I'm not waiting for LC's business loans.  I've started investing thru Dealstruck.

BruiserB

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Why Small-Business Lending Is Not Recovering
« Reply #4 on: August 04, 2014, 08:21:56 PM »
One shouldn't confuse LC's small business lending, which I believe they are testing with institutional clients only now (and presumably are doing proper business evaluation), with loans listed on the retail platform with a purpose of business.  Those are issued based only on the personal creditworthiness of the applicant.  I had fairly dismal results with those I purchased myself early in my investing.  None of my filters allow for them now.  I do see an occasional one pass a P2P Picks screening and I do purchase those as I trust Bryce's algorithms.

It will be interesting to see how LC's true business loans end up performing, and if they will eventually open them to retail investors.

AnilG

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Re: Why Small-Business Lending Is Not Recovering
« Reply #5 on: August 05, 2014, 02:03:43 AM »
One shouldn't confuse LC's small business lending, which I believe they are testing with institutional clients only now (and presumably are doing proper business evaluation), with loans listed on the retail platform with a purpose of business.  Those are issued based only on the personal creditworthiness of the applicant.

It will be interesting to see how LC's true business loans end up performing, and if they will eventually open them to retail investors.

No one will likely issue a business loan for $35K or less so the business owner has no choice but to apply for small loan amounts as personal loans. Most business loans are typically 50K+ and as article points out the established channels have much higher threshold.
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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turing

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Re: Why Small-Business Lending Is Not Recovering
« Reply #6 on: August 05, 2014, 01:55:59 PM »

  • Regarding points of access to capital, community banks have long been crucial to small business lending. But community bank failures have been high and few new ones have started up.

I wonder how much of this due to increased regulatory burdens after financial mess in 2008?  Things like Dodd Frank.  I'm sure it is harder running a small bank now then it ever was before just in terms of regulatory burden.

P2P Lending should do a pretty good job addressing at least a few of these problems the article listed.

rawraw

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Re: Why Small-Business Lending Is Not Recovering
« Reply #7 on: August 06, 2014, 09:13:58 PM »

  • Regarding points of access to capital, community banks have long been crucial to small business lending. But community bank failures have been high and few new ones have started up.

I wonder how much of this due to increased regulatory burdens after financial mess in 2008?  Things like Dodd Frank.  I'm sure it is harder running a small bank now then it ever was before just in terms of regulatory burden.
Dodd Frank's real impact is on consumer loans.  I don't think it'd impact business lending much.

AnilG

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Re: Why Small-Business Lending Is Not Recovering
« Reply #8 on: August 06, 2014, 09:58:12 PM »
I expect community bank lending will be complemented by community P2P lending. There is an opportunity for communities to lend and support to local businesses in their area. I am surprised that startups haven't targeted community based lending yet.


  • Regarding points of access to capital, community banks have long been crucial to small business lending. But community bank failures have been high and few new ones have started up.

P2P Lending should do a pretty good job addressing at least a few of these problems the article listed.
---
Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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BruiserB

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Why Small-Business Lending Is Not Recovering
« Reply #9 on: August 06, 2014, 10:39:59 PM »

I expect community bank lending will be complemented by community P2P lending. There is an opportunity for communities to lend and support to local businesses in their area. I am surprised that startups haven't targeted community based lending yet.


  • Regarding points of access to capital, community banks have long been crucial to small business lending. But community bank failures have been high and few new ones have started up.

P2P Lending should do a pretty good job addressing at least a few of these problems the article listed.

Although when you look at the recent poll on here the majority listed "alternative to stock market" or "better than savings account" as the primary reason for P2P investing. I personally consider someone in Florida or Ohio or Texas as local as someone in my own city so I don't feel any special affinity for lending within my own community. I wouldn't give up returns to lend to a nearer neighbor.

Fred

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Re: Why Small-Business Lending Is Not Recovering
« Reply #10 on: August 07, 2014, 01:04:27 AM »
A paper by the Fed on LendingClub "small business" loans: http://www.federalreserve.gov/pubs/feds/2014/201410/201410pap.pdf

I had email conversations with Traci on some of the details on Tables 8 - 10 of the paper; however, in general it specifies:

1- loans for a small business were almost twice as likely to have been funded than loans for other purposes.
2- funded business loans were slightly larger than loans funded for other purposes, but paid similar interest rates.
3- compared to small business loans from traditional sources, peer-to-peer small business borrowers paid an interest rate that was about two times higher.
4- loans for small businesses were much more likely to be delinquent or charged off.
« Last Edit: August 07, 2014, 01:39:51 AM by Fred »

turing

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Re: Why Small-Business Lending Is Not Recovering
« Reply #11 on: August 07, 2014, 11:07:50 AM »
Dodd Frank's real impact is on consumer loans.  I don't think it'd impact business lending much.

Consumer lending was one aspect of Dodd Frank but it impacted all banking and financial companies.   Even if the Act itself didn't directly address business loans, the Act's impact on small banks has a major impact on small business loans.

Here are several articles talking about the "increased regulatory burden on small banks".
Impact on Small Banks in DC Area
Regulatory Burden on Small Banks from Dodd Frank
Increased Compliance Costs on Small Banks
Dodd Frank: Too Small to Survive is New Rule

rawraw

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Re: Re: Why Small-Business Lending Is Not Recovering
« Reply #12 on: August 07, 2014, 11:14:07 AM »
Dodd Frank's real impact is on consumer loans.  I don't think it'd impact business lending much.

Consumer lending was one aspect of Dodd Frank but it impacted all banking and financial companies.   Even if the Act itself didn't directly address business loans, the Act's impact on small banks has a major impact on small business loans.

Here are several articles talking about the "increased regulatory burden on small banks".
Impact on Small Banks in DC Area
Regulatory Burden on Small Banks from Dodd Frank
Increased Compliance Costs on Small Banks
Dodd Frank: Too Small to Survive is New Rule
Small banks generally do lots of commercial real estate. If you pull their Call report you can see this. So I'm extremely skeptical of those claims

turing

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Why Small-Business Lending Is Not Recovering
« Reply #13 on: August 07, 2014, 12:42:03 PM »
Small banks generally do lots of commercial real estate.  If you pull their Call report you can see this.  So I'm extremely skeptical of those claims

Skepticism is very healthy thing to have.  I'm definitely not a small bank expert and do not have my own first hand knowledge on the subject.

But when multiple sources and multiple types of evidence (anecdotal, survey's, research) confirm the same thing I generally start to believe it unless there is some reason to believe they all have some sort of agenda that would bias their opinion.

If the claims are not true, what do you think the agenda is for the individual banks quoted, George Mason University and their research, and Federal Reserve and their research (citation)?

rawraw

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Re: Re: Why Small-Business Lending Is Not Recovering
« Reply #14 on: August 07, 2014, 12:46:47 PM »
Small banks generally do lots of commercial real estate.  If you pull their Call report you can see this.  So I'm extremely skeptical of those claims

Skepticism is very healthy thing to have.  I'm definitely not a small bank expert and do not have my own first hand knowledge on the subject.

But when multiple sources and multiple types of evidence (anecdotal, survey's, research) confirm the same thing I generally start to believe it unless there is some reason to believe they all have some sort of agenda that would bias their opinion.

If the claims are not true, what do you think the agenda is for the individual banks quoted, George Mason University and their research, and Federal Reserve and their research (citation)?
No banks like regulation. Especially during low rates. Basically means increased overhead with no offsetting income when margins are already thin