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BFS Capital Blog

Bridging the Gap in Banks’ Small Business Lending

September 12, 2013

Although it stands to benefit our industry (non-traditional lenders and sources of working capital for businesses) and us as a company, it’s pretty disheartening to still be seeing so many news stories about the continuing struggles of small business owners in getting the capital they so desperately need and deserve.

A recent story last week on illustrated a familiar theme — solid, profitable, creditworthy small businesses that are being denied credit by banks. And the grueling process (called “gut-wrenching” by one small business owner in particular) they’re subjected to on their way to rejection.

CNBC points out the discrepancy between banks that have fully recovered (and then some) from the Great Recession and the amount of lending they’re doing to smaller businesses. For the first time, banks are finally lending more than they did in 2008. Their profits are soaring; their balance sheets are flush with cash. All the indicators are there: Banks have come roaring back from the economic downturn.

But somehow, funds don’t seem to be trickling down to small businesses. In fact, FDIC data show a nearly 20 percent decrease in small business loans ($1 million or less) outstand since the beginning of the recession. As part of the Small Business Jobs Act, the $30 Billion Small Business Lending Fund launched in 2010 was a “nonstarter,” unfortunately. The requirements were too stringent; the process slow and unwieldy. Meanwhile, while many banks’ requirements include several years’ profitability and lots of collateral to even consider lending to a small business, their lending to larger companies has been ticking steadily upward. The FDIC graph below illustrates the point.

But here’s where the small business credit story starts to take a turn for the better. As CNBC says, increasing numbers of small and medium-size businesses are circumventing banks altogether, in favor of “alternative” lenders like credit unions, micro-lenders and others. Among those “others” are companies like BFS Capital that, before, during and after the economic downturn, have been here, providing working capital to businesses of all shapes and sizes—small, medium and large. As a result, we’ve seen our client base grow significantly and become more diversified in terms of size, industry sector, geography and creditworthiness. In other words, in addition to the small businesses we’ve always served, we’re now working with more mid-size and large companies as well. They’re all over the country and increasingly have solid balance sheets and are poised for growth. That’s why we now offer loans of up to $2 million—while continuing to do a thriving volume in the $250,000+ range and above.

This is where business credit—and who’s meeting the capital needs of business—becomes an even bigger story. So-called “alternative” sources of capital are now mainstream, meaning that businesses of every ilk are deciding to come to companies like BFS Capital first, as opposed to a last resort. There are several reasons for this. First, we take a different approach to the review and evaluation process. While banks’ underwriting criteria is designed to first protect them from risk, we like to turn that perspective on its head and look first at a company’s potential for growth. More and more, we’re lending to companies with solid growth plans who can’t pass muster with the banks.

Business owners also come to us for the speed and ease with which we’ll turn around their application and approval. While banks typically require considerable paperwork and documentation, initially we ask for a simple application. While businesses must typically wait weeks and even months for banks to fund their loans, BFS can provide funding within five business days from approval. We get it—when companies need capital, they need it now.

And in a nutshell, that’s probably the overriding reason more and more businesses are coming to BFS for capital: We get business—and we get them. We believe in business—and small business as the backbone of the U.S. economy. We try to do everything we can to be their supporter and champion.

It’s probably fair to say that the bank credit landscape for small business will eventually thaw out. But by that time, many businesses large and small will have carved out new ways to access capital—pathways that bypass the banks and lead them directly to providers like BFS.