The state of small business: What banks need to know

No slowing the SBA train

Small Business Administration lending is on pace for a third consecutive year of record expansion. Through April 28, total loan volume in the SBA’s signature 7(a) program totaled just under $14 billion, up 9.3% this fiscal year from the comparable period in fiscal 2016, and up 19% from two years earlier. So what’s driving the increased volume? Firms’ desire to expand is part of it, but bankers say the surge is mostly a result of companies refinancing higher-cost commercial loans and into SBA loans with more favorable terms.

Optimism is running high

Most business owners report that their companies’ sales, profits and general financial condition will improve in the coming year. In a survey of firms in its market with at least of $100,000 of revenue, Citizens Financial Group found that 69% of business owners expect their financial condition to improve or significantly improve over the next 12 months, due largely to increased consumer confidence. On the flip side, 23% of respondents said they expect business conditions to weaken over the next 12 months and 8% expect their finances to significantly deteriorate.

Start spreadin' the news

New York City has overtaken San Jose as the best small-business city in America, according to Biz2Credit. Using data it gathered from firms that applied for loans in 2016, Biz2Credit found that small businesses in New York had the highest annual revenue (just shy of $1 million) and the longest average tenure (76 months), and that their owners had higher personal credit scores (646) than their counterparts in other metropolitan markets. Rounding out the top five are Miami-Fort Lauderdale, Austin, Texas, San Jose and Los Angeles.

Credit is (finally) available...

It’s been nine years since business owners have been this confident about their ability to access credit. In a recent survey of firms with annual revenues of up to $20 million, 48% of respondents said that credit would be easy or somewhat easy to obtain over the next 12 months while just 17% said it would be difficult or somewhat difficult. (The rest either don’t expect much to change or refused to answer.) A year ago, only 38% of respondents to the quarterly survey conducted by Wells Fargo and the Gallup Organization said that credit was easy to obtain and at the height of the financial crisis fewer than 20% expressed confidence about getting loans. The last time that figure was as high as 48% was in the first quarter of 2008.

...But not all firms are eager to borrow

Citizens, Wells Fargo and TD Bank all recently surveyed business owners about their credit needs and what came through loud and clear is that many firms are unwilling to take on debt to market their wares, buy equipment or expand. Only 18% of firms surveyed by Wells and 21% of those surveyed by TD said that they intend to apply for a loan in the next year and most of the respondents to Citizens’ survey said that they would first use cash on hand, rather than take out loans, to fund purchases, tech upgrades or expansion. The good news for bankers: More than 70% of TD respondents who plan to borrow said they would do so through their primary bank and the Citizens survey found that most expansion-minded firms would turn to banks and credit cards as secondary funding sources.

Where are the job creators?

Startups are not creating jobs like they used to. According to the Bureau of Labor Statistics, firms less than one year old employed just over 3 million people in 2015, slightly more than they employed a year earlier but a far cry from the roughly 4.7 million people startups employed in 2000. This is despite the fact that the pace of startup activity, which slowed considerably during and after the financial crisis, is now back at 2000 levels. Simply put, these firms are taking on fewer workers. In 2015, they employed an average of 4.5 workers, compared to 6.9 in 2015. On the bright side, 2015 was the first year since 2008 that employment at firms less than a year old topped 3 million.