TheStreet recently reported that small businesses should also consider big banks as sources for loans, but backlash spurred a deeper look into how these banks truly handle small-business requests. MultiFunding, a company that specializes in assisting small business in acquiring funding, recently began rating FDIC-insured banks on how they treat small business. The poorest performers based on the survey criteria ended up being some of the largest banks, including Bank of America, JPMorgan Chase, Citigroup and HSBC. Conversely, Multifunding reported that the best handlers of small-business loan requests were typically community banks. For more on this continue reading the following article from TheStreet.
After the recent negative response to an article on Bank of America's small-business lending efforts, we decided to ask a few more industry sources on what is really going on at the big banks.
Ami Kassar, CEO of MultiFunding, a broker for small-business loans, says big banks are far from the best place for a small business to get a loan.
MultiFunding helps small-business owners get the best possible loans at the lowest possible prices. The firm helps small-business owners understand their options in the marketplace and works with them to make sure they're getting the best possible deal from the bank or the lender, Kassar says.
The company works with hundreds of lenders, including large, small and community banks, credit unions, asset-based lenders, accounts-receivable lenders, equipment lenders and merchant-cash lenders, among others.
Last month, MultiFunding launched BankingGrades.com to grade every FDIC-insured bank in the U.S. based on how many small-business loans it makes.
The inaugural report found that some of the nation's biggest banks have the worst performances when it comes to small-business lending. And which big banks were among the worst? Bank of America, JPMorgan Chase, Citigroup, Bank of New York Mellon and HSBC.
Banks that had the best small-business lending performances tended to be community banks, it says.
We asked Kassar to elaborate on what he's seeing in the small-business lending space.
What is the typical business you work with?
Kassar: Typically our small-business clients that we work with [have] $2 million of [annual] revenue or less. They don't have a CFO in place. So the owner of the business or the CEO of the business is acting as the CFO as well. We believe that the businesses that we work with represent the definition of a true small business. There is something in to the tune of 26 million small businesses in the United States ... There are different statistics, but the vast majority of them have revenue of $1 million or less.
So is that the definition of a small business?
Kassar: There are a lot of different definitions about what constitutes a small business loan, which makes the data really confusing and difficult to read.
The Federal Reserve, when they release their small-business report, many times they're defining a small business as having revenue of $50 million or less. That data is hard to navigate because if you're lending money to a business with $30 million or $40 million worth of revenue, that's very different than lending money to a Main Street business that has a couple hundred thousand dollars in revenue.
It gets more confusing because the big banks love to tout their small-business lending reports for small businesses with revenue of $20 million or less. Again, if they're lending money to a company with $10 million or $15 million worth of revenue that's in a whole different department in the bank and a whole different story than lending to Main Street businesses.
The FDIC adds another level of confusion. They define revenue as businesses that have [loan] balance of $1 million or less. And the SBA has its own set of definitions about what constitutes a small business that I don't even pretend to understand.
On Banking Grades, we've chosen to use the data from the FDIC call reports because we think that's the most accurate indicator that is currently available of small-business lending.
So are big banks lending to small businesses?
Kassar: When you look at the data there for the big banks you see that their small-business lending is largely flat or down during the recession.
Between the fourth quarter and the first quarter, Citibank is down, Wells Fargo is down in multiple balances, Chase is about even and Bank of America is up about half a percent for all of their holding companies under their corporate umbrellas. That's a completely different story from the images they portray in their press campaigns, in their advertising that they love to run about how friendly they are to small businesses and how they're honoring their commitment to the government. It bothers me that they place these ads out there and then the small businesses follow the ads and go to their branches and meet bureaucratic processes where people at the branches aren't empowered to make decisions.
So why aren't big banks lending to small businesses?
Kassar: There's a couple of reasons. Lending to small businesses, if you're not well organized, can be risky. Small-business loans are one of the riskiest loans to make. They're complicated, they take time and if you do them properly they're not easy to do. So the bigger and more complicated your bureaucracy is and the bigger and more complicated your decision-making system is, the harder it is to make small-business loans.
We have the most luck with small-business loans when we go to community banks where the banking officer and the credit officer sit in the same office together and the banking officer working with the small business takes their case to the credit committee and pitches their loan. And there's little room for error and there is little room for confusion in the process.
Yet Bank of America, as an example, is hiring 1,000 small-business bankers. Doesn't that mean they will be lending more to small businesses?
Kassar: What does that mean? Are they there to sell life insurance and cash management systems or get new checking accounts from the small businesses? Or are they there to help small businesses get loans? I'd like to know from BofA how they're empowering those 1,000 bankers to make decisions and to be able to help the small businesses. I'd like to know from BofA when they're sending those bankers out onto the street, what kind of small businesses are they targeting? Are they targeting true small businesses? Or are they targeting businesses with $5 million to $20 million worth of revenue?
Which big bank has the worst record of small-business lending?
Kassar: Citibank has $9 billion of small-business loans on portfolio. Compare that to Wells and Chase and BofA, where small-business loans are in the mid-20s and higher.
How do credit unions and alternative lenders fit into the discussion?
Kassar: Credit unions can be a good place for a small business to get a loan. We don't include them in Banking Grades because they don't issue the same reports as the FDIC-insured banks do. Alternative lenders add an additional element to what makes small-business lending so difficult to understand because they are thriving and strong since the recession and since more and more small businesses have had to go to them. They aren't regulated. There are no reports out that tell us how much they are lending or at what rates they are lending at. Our hypothesis is that the alternative lenders have been and continue to become a bigger and bigger piece of the overall small-business lending puzzle.
How do you think big banks can improve?
Kassar: First of all, empower their folks in the branches and educate them to make decisions to help small businesses and start lending to them. Start issuing reports to the public and to the government that accurately reflect what they're doing to lend to small businesses.
I think it's important to note that the top 40 banks or so in the country have about 45% or 50% of the bank branches in the country, and so the greatest likelihood is that a small-business owner is going to walk into one of these branches. That's why I think this issue is so important.
This article was republished with permission from TheStreet.