Many financial analysts have speculated at the current state of the lending marketplace and more importantly the cause for the current state of lending in this country. Most studies end up inconclusive despite theories that demand is low, quality of applicants is low, and lending criteria has tightened. Certainly the common perception among small business owners and other members of the financial community is that traditional financial services are more difficult to get today, whether its a business line of credit, business loan, or other small business oriented lending service.
As members of the financial community involved in actively seeking out interested parties and attempting to piece together opportunities that prove profitable for all parties, we have heard from many of our competitors and colleagues that demand is low, quality is low, and lending institutions are tight. And so, we turn to the market analysis. Attached to this article are the findings of the Federal Reserve Bank of New York in a small study conducted over the summer of 2010 taking a closer look at lending in New York. Unfortunately, the findings are fairly inconclusive which may or may not be partly due to the small sample size for a study like this.
Still, I find it interesting that this study narrowed it’s view to a list of products that includes the following: personal credit card for use in business, change in limit on existing credit card, business loan, financing for vehicle or equipment, extension of existing business line of credit, new small business credit card, and new business line of credit. No mention of business cash advances or Purchase Order financing, two of the fastest growing financial services of today. I wonder if the data would have been terribly skewed if they had included those services. For starters, chances are many of the businesses that were polled will have no idea what either of these services are, but a decent chunk of these business will most definitely have applied for one or both of these products.
This study attempts to ascertain what criteria lenders are paying the most attention to when determining approvals and have concluded that time in business and profitability were the most important factors. Sadly, if we only lend to already profitable businesses who are well-established in our field, lending is likely to cease to exist. More or less, we’re admitting that what we want to do is lend to those who have no need for it, or whose need is based in a desire to grow or expand in a way that current retained earnings would not allow. However, there is most definitely a fear that if lenders continue down this path, there will be an even greater disparity between the upper and lower classes with the middle class continuing to disappear at an even faster pace.
But if there’s one thing we’re short on these days it’s solutions. There is no obvious solution, and more so, who will be charged with changing the face of American lending and how will you enforce those changes? Caution is a virtue, but risk and reward go hand in hand. It will take bold ideas and risky entrepreneurs to turn this around, and there seems to be a noticeable shortage of those individuals in the financial sector today.