Small-Business Lending 5 Years After Lehman

By Small BusinessFOXBusiness

September brings two somber anniversaries. The first, and most heart-breaking is 9/11. An equally devastating event on the U.S. economy came on September 15, 2008, when Lehman Brothers, the fourth-largest investment bank in the U.S. at the time, declared bankruptcy and kick-started the "Great Recession."

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We are still feeling the effects today.

At the time, banks were lending freely to small businesses. Prior to the Lehman collapse, big bank ($10B+) loan-approval rates approached 45%. Today, they approve only 17.6% of loan applications, according to the most recent Biz2Credit Small Business Lending Index, my company's monthly analysis of funding approvals (August 2013 figures).

During the darkest days of the so-called credit crunch, from May 2011 through June 2011, fewer than one-in-ten loan requests were granted by big banks. And those who did receive funding had to provide financial documents spanning three years of operation -- and thorough documentation of revenues and profits. Established businesses had to submit financials, which, of course, were down because of the recession.

Another quite unforeseen consequence of the post-Lehman/Great Recession credit crunch was that banks refused to loan even to their own customers for whom they held deposit accounts. This was unprecedented. In previous economic downturns, banks would at least be willing to lend to their own customers.

The situation made it nearly impossible for a startup to receive funding from a big bank. No one seemed willing to take a risk on a startup company, even ones that had good ideas and presented solid business plans.

So what happened?

Firstly, by closing the spigot on small businesses, banks opened the door for alternative lenders. Credit unions became increasingly active in lending to entrepreneurs and gained market share. Alternative lenders, including factors, merchant cash advance companies, and micro-lenders made financing available, but at higher interest rates than "traditional" lenders.

Secondly, technology enabled small business owners to easily search for other sources of funding when banks turned them down. Mainstream businesses, which never would have shopped around on the web for funding prior to the "Great Recession," turned to the Internet because of necessity. They quickly discovered that the same advantages that technology offered shoppers also applied to b2b transactions, such as small business lending.

Online retailers such as Amazon had made it easy for consumers to purchase goods online at attractive prices. However, the financial services industry was slow to adapt. Even to this day, a large number of financial institutions still do not have the infrastructure in place to accept online loan applications. Those who lag risk falling even further behind as people increasingly look to conduct business via their smart phones.

Lastly, banks came to realize how important small-business lending was to their portfolios. When the housing market tanked, the mortgage market bottomed out. Where else could lenders make money? The small-business credit market had long proven to be profitable. Once the economy rebounded a little, banks started focusing on their business lending capabilities and started pumping millions in marketing dollars to promote it. Additionally, SBA loan guarantees stimulated the market by removing some of the risk in granting small businesses credit. The role of the agency in the survival of the economy cannot be overlooked.

Additionally, as the recession led to corporate downsizing and a dearth of jobs for college graduates, more and more people began to take a shot at pursuing their entrepreneurial dreams. Small businesses became recognized as a driver of the U.S. economy and the primary source of private sector job-creation. And to grow, they need capital!

Five years after the collapse of Lehman Brothers, capital is not even close to the free-flowing level it was at in the mid 2000’s. Although it pales in a year-to-year comparison to pre-recession levels, the 17.6% figure represents a 62% increase from August 2012.

The halcyon days of startup funding may never return. However, the outlook for small-business lending is brighter now than at any other time in the past few years. This is good news in the post-recession era.

Rohit Arora is co-founder and CEO of Biz2Credit, an online credit marketplace that connects small- and medium-sized businesses with a network of 1,200+ lenders, service providers, and complementary business tools.  Having arranged $1 billion in funding, Biz2Credit is a leading resource for loans, lines of credit, working capital and more.  Follow Rohit on Twitter @Biz2Credit and on Facebook.

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