Fed survey: Smallest business borrowers do better at small lenders

OK, it’s as you expected.

Smaller is better when it comes to borrowing from banks.

Small businesses reported that they had better luck borrowing from small banks and credit unions than they did at big banks, according to a recent survey by the Federal Reserve.

The Federal Reserve system’s dozen regional banks, including the Federal Reserve Bank of Atlanta, surveyed 15,000-plus small businesses in all 50 states.

Small businesses were defined as having fewer than 500 employees, but the smallest businesses were counted as those with less than $1 million in revenue.

Access to credit for such firms is an important issue for the economy, according to the Federal Reserve, because small employers account for most job growth in the United States.

Sixty-one percent of the small employers surveyed said they faced financial challenges last year. In about three-quarters of those cases, the companies’ owners said they used personal funds to meet cash shortfalls, while many also borrowed from outside lenders or stretched their dollars by paying bills late or downsizing.

The smallest firms — those with less than $1 million in annual revenue — had a harder time getting loans because they have shorter credit histories and weaker credit scores, according to the survey. Those smaller firms accounted for 70 percent of the businesses surveyed.

Most of the time, small business owners used their own money and personal credit scores to provide or borrow working capital.

But in the cases where the smallest companies did seek loans, about 49 percent applied to big banks and 42 percent applied to small banks.

Smaller firms were also more likely to apply to online lenders than bigger firms with more than $1 million in revenue. Twenty-six percent of the smallest firms borrowed online, vs 12 percent of the bigger firms.

But the smallest firms had more success getting loans from small banks and online lenders (60 percent and 59 percent, respectively) than big banks, where 45 percent of applicants succeeded in getting loans.

Seventy-five percent of the borrowers said they were happy with small banks and credit unions, according to the survey.

Big banks and online lenders — not so much. Only 46 percent were happy with the big banks, and only 27 percent were happy with the online lenders.

But small businesses had their best luck getting loans — with a 77 percent approval rate — from so-called “community development financial institutions” that target underserved markets and populations.

Locally, such lenders, which are partly backed by the U.S. Treasury Department, include the ANDP Loan Fund, a unit of the Atlanta Neighborhood Development Partnership, and Access to Capital for Entrepreneurs, or ACE, based in Cleveland, Ga.

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