With reports indicating 2023 will lead to a recession, big lenders are taking a more cautious approach to loans for small- and medium-sized businesses (SMBs), but with SMBs representing more than half of the economy and contributing over over 12.9 million U.S. jobs over the last 25 years–it’s more important now than ever that SMBs get the financial support they need.
SMBs provide more than jobs – they are the backbone of our economy and bring jobs and revenue to the local economy through local products, sales and property tax payments, and the use of local vendors. An American Express study from 2018 shows shows that for every dollar spent at a small business, two thirds stays in the local community compared with the 46% that funnels back from large businesses.
Challenges for SMBs
We’ve seen over the past decade that during times of economic uncertainty, U.S banks have been rewarded for lending to large companies instead of SMBs. Loans to all US businesses grew 144% over the last 20 years (2001-2021) while the small business loan segment (<$1MM) grew only 56% over the same time frame. Small business loans are now only 20% of all C&I (commercial and industrial loans) where they were 29% of all loans in 2001.
This disparity in investment doesn’t align with the benefits SMBs bring to the economy. It’s a massively underdeveloped and underserved market with many SMBs needing to seek alternative and expensive forms of financing.
In recent years, SMBs have struggled to secure capital for many reasons. Increased loan regulations have added more cost and complexity for SMBs, while the growing popularity of fintech have forced many community banks – which have historically provided over 50% of small business loans – to close, directly impacting SMBs access to the capital they need to succeed.
With fewer options for local financing, SMBs look to big banks that have narrower underwriting criteria or fintech lenders that provide loans with higher interest rates and shorter terms than conventional bank loans. Until major regulatory changes are made, I would expect to see continued banking consolidation making it harder for SMBs to access their historical primary source of financing.
Why SMBs are still a smart investment
Despite the varied financial modeling that exists today I find it disappointing that many large institutions still categorize SMBs broadly as risky investments. SMBs are an incredibly nuanced segment of the market which is why relationships outweigh a financial fact sheet in understanding the value of the enterprise.
We have maintained decades-long relationships with over 750,000 SMBs, with our average tenure hinging on ten years. The SMBs we’ve partnered with have strong growth potential and through our long history working with these clients we’ve come to understand their needs and have found that time and time again that these businesses are stable with solid bones that can weather economic storms.
SMBs on the rise in 2023
According to a recent survey by Bank of America, 52% of small business owners plan to expand their business – up from 37% this spring, with 83% planning to obtain funding for their business —up from 70% this spring.
Despite recession fears, inflationary concerns and commodity prices increasing, the report found that small businesses remain optimistic and resilient with 77% of entrepreneurs saying their business is equipped to survive a recession.
Still, a strong majority (88%) say that inflation and supply chain issues (80%) are continuing to impact their operations, leading to price increases.
Despite the uncertain macro-economic environment, lenders need to take a more responsible and nuanced approach to assessing the value in SMBs and take this opportunity to close the lending gap so Main Street can continue supporting our economy.
Christopher Johnson is the Senior Vice President and President, Global Financial Services at Pitney Bowes
Pitney Bowes renewed commitment to Main Street: Earlier this year we reaffirmed our commitment to small business lending with the announcement of up to $10 million in financing to two small business clients. With Pitney Bowes Bank, both firms were able to expand their financing networks without disrupting their primary banking relationship. Sometimes a business’s capital requirements are beyond their bank’s ability to lend. As a complementary financial partner, we can help bridge the gap. Our clients create a financial ecosystem of lenders helping them avoid over-accessing their primary credit facility; ensuring they have accessible credit for unforeseen expenses; and allowing them to secure capital to invest in and grow their organizations.
Recession fears stock image by eamesBot/Shutterstock
