Small businesses that cleared the hurdle of the coronavirus shutdowns are now encountering an all-too-familiar obstacle: Banks don’t want to lend to them.
The Paycheck Protection Program funneled $525 billion in forgivable loans to millions of small businesses in the pandemic’s early days. Yet that massive infusion masked a yearslong contraction in small-business lending that happened alongside a big-business borrowing boom.
In 2007, banks held $721 billion in small loans to businesses and small commercial mortgages of $1 million or less, according to an analysis of bank regulatory filings by Florida Atlantic University professor
Rebel A. Cole.
By 2019, such loan balances had fallen around 6% to $680 billion. Bigger business loans and commercial mortgages, meanwhile, more than doubled to $2.82 trillion.
There are a few reasons for the credit chasm. Thousands of community banks disappeared over the past decade, removing the main funding source for many of their local businesses. Small loans are also far less profitable: Bankers say it costs about the same to process an application for a $100,000 loan as it does for a $1 million one.
Lenders have further pulled back during the pandemic, tightening underwriting standards for small businesses this summer to a degree unseen since the last financial crisis, according to a Federal Reserve survey of loan officers.
At
& Co., America’s biggest bank by assets, non-PPP loans to small businesses fell to $956 million in the third quarter, the lowest level since 2010. Nonbank lenders and financial-technology companies, go-to funding sources for small businesses in recent years, have scaled back, too.
PayPal Holdings Inc.
and
Square Inc.
paused new credit offers in the spring and haven’t returned to pre-pandemic lending levels. Kabbage Inc. has yet to make new loans since it sold itself to
American Express Co.
earlier this year.
Lenders even curtailed loans made under the Small Business Administration’s traditional lending program, in which the government bears most of the default risk.
Credit can’t save businesses that aren’t viable. But without it, firms that persevered through the pandemic could lack the funding to rehire laid-off workers, preventing the labor market from healing itself and hampering the economic recovery. After the last recession, a lack of credit forced smaller firms to reduce their employment growth by as much as 10.5 percentage points relative to larger ones that had more borrowing options,…
Read More: Small Businesses, Hit Hard by Pandemic, Are Being Starved of Credit