Dowsing for Dollars

This past week marked more conversations with people who say their business is picking up than I can remember in a while. This got me wondering if small business access to credit is picking up as well.  From what I can tell, it’s getting better, but not in the usual way.

Financing consultant, Multifunding pulled together a fascinating post on how banks’ number of loans of less than $1 million is much lower than the number of small business loans they report.  There are small businesses that get loans of more than a million dollars, but not that many.  (It’s worth noting that the smaller number is in regulatory reports and the larger number in press releases.)  This discrepancy between bank publicity on small business lending and regulatory filings is consistent across all the big name banks. 

On the other hand, people who provide alternative financing are so busy they can’t keep up.  So the banks say their small business loan portfolio is growing and the factors are busy, and the economy is slow!?  That would be impossible.  Business Week’s piece on small business funding through receivables (a.k.a. factoring) has pages of testimonials from small business owners who are growing their business thanks to alternative financing.  Not to say that this is all good news.  Factoring loans are expensive.  In addition, Factoring is essentially unregulated.  So it’s higher cost and higher risk.  This creates a potential vicious circle for small business credit scores where they are compressing margins, adding debt and therefore look even less attractive to banks.

Despite the outrage expressed by ”Occupy…” it’s hard to make the case that banks are aligned in a conspiracy against small business lending.  Banks with a successful small business loan portfolio make more money than banks that just hold cash in the vault.  The issue is that the analytics that used to signal the loan would be good; don’t work well in the current environment.  There are alternatives out there, like On Deck Capital, but my guess is the shortest route to losing your bonus as a banker these days is to try something new.  It was new analytics that short circuited the whole system.  I’m not saying I agree with this logic, but I do think it’s a dynamic driving behavior.

Factoring is clearly a much used source of working capital by an increasing number of businesses.  This starts to create a virtuous circle around increased liquidity and increased competition.  The growth in receivables financing infrastructure companies like the Receivables Exchange  adds weight to the idea that so-called alternative financing is becoming more mainstream.  While the world of finance doesn’t move at the speed of tech gadgets, traditional bank loans could be heading down the path of phones without a touch screen.  Seen any lately?