Karen Mills, the Administrator of the Small Business Administration between 2009 and 2013, wrote a working paper for the Harvard Business School about the obstacles that small and medium-sized businesses (SMBs) still face in today's economy when they attempt to take out loans. According to data released last month by the Federal Deposit Insurance Corporation, while business loans in general have been growing steadily since 2011, small business loans are an exception, as they have remained mostly stagnant and are currently below 2008 levels.
In her paper, Mills identifies three factors that she believes have led to this situation:
- Community bank consolidation: Community banks, which are locally owned and operated, have traditionally been a main source of small business loans, but their activity is on the decline. With the recession, many community banks were purchased and consolidated by their larger counterparts, to the point that there are now 7,000 of them in the United States, half as many as in 1985. This forces SMB owners to apply for loans at large banks, which have much lower approval rates.
- Lower credit scores: The recession hit small business owners hard, with their average income declining by 19 percent from 2007 to 2010. This lowered their credit scores, and in turn, fewer loans were granted.
- Stricter regulations: In the wake of the subprime mortgage crisis and the subsequent record fines levied against banks, financial institutions are very cautious about granting loans to borrowers with low credit scores.
Commercial loan software can help lending institutions determine ideal installments and terms when considering a small business loan. This tool allows lenders to set amortization schedules, ensuring automated, on-time payments and reducing the risk of default.