The Wall Street Journal had an interesting article highlighting just how much banks have cut back on lending (Lending Falls at Epic Pace, Feb 24). It started with this eye-catching chart:
So the past year has seen a dramatic drop in the number of loans banks are willing to write. This measure is in some ways a little crude. It is lumping together consumer loans for used cars with lines of credit for businesses. The latter is what I am interested in. As the Journal notes, this is hitting some small businesses hard. A related story in the Toronto Globe and Mail (Small companies, big squeeze, Feb 15), notes that there is a growing split between big and small firms when it comes to access to credit to fund operations:
As the U.S. tries to navigate its way out of the worst recession in decades, companies see two very different economies, depending on their size. Large, established businesses can borrow money from investors through the corporate bond market, which has come roaring back to life after shuddering to a halt during the financial crisis. Small firms, by contrast, aren’t so lucky: They don’t have the option of bypassing banks, which remain wary of lending.
That dichotomy is becoming increasingly central to the fledgling economic rebound. Traditionally, small businesses have provided an outsized proportion of new jobs as the U.S. economy emerges from recession. But without access to capital, it will be difficult for them to play that role.
So it is hard to be a small firm — that has almost always been the case. But this highlights the ongoing challenges of businesses coming out of the recession. Financing is now not just a consideration in making operating decisions but is really becoming a limiting factor. (We have written on this a few times before.) There are, of course, other ways to get money than just the local bank. The Globe & Mail notes that more businesses are turning to “alternative lenders:”
While such financing is considerably more expensive than a bank loan, it can be a lifeline, since it allows small businesses to borrow against their accounts receivable.Mitch Jacobs, chief executive officer of On Deck Capital, a New York-based alternative lender to small businesses, says that his discussions with banks indicate that they’re declining about two-thirds of the loan applications from such firms.
“They [small businesses] are facing an exacerbated version of the historical challenge of accessing credit for ongoing operations,” Mr. Jacobs says.
That opens up space for his company, which has served about 2,000 customers since it began lending two years ago. Typically his clients are businesses with annual revenues of less than $3-million, which have tried – and failed – to secure a bank loan. Often, says Mr. Jacobs, their businesses remain healthy but their personal credit scores have suffered, which can disqualify them from consideration by a bank.
(See also this New York Time article.) In these alternative lending arrangements, loans are often secured with accounts receivable or inventories. I have seen some attempts by OM researchers to try to model how these loan covenants interact with operating decisions (e.g., stocking levels). I have to admit that these modeling efforts haven’t always been satisfactory. But it is an interesting question to understand how the tighter integration of operating and financing decisions play out.