One of the interesting business trends to have witnessed going back a decade is how small business owners have chosen a loan source. But the future trend should be even more interesting.
Looking back, there have been primarily three sources of loan funds for growing small businesses:
1. Large, multi-state banks
2. Community banks, locally owned and managed
3. Credit unions, also locally determined
In a recent online poll we asked small business owners about their borrowing preference. One-sixth of our respondents chose “large bank,” which is down from a decade ago. Following the 2008 financial crisis large banks stopped lending to small business while they struggled with their own regulatory stress test. They’re lending to small businesses again, but are now in catch-up mode.
One-eighth of our sample selected “credit union,” which is higher than the past. Much to the chagrin of banks, credit unions have expanded their customer profiles to include small businesses, aren’t taxed like banks, and aren’t subject to community reinvestment requirements. I predict the credit union loan option will grow for small businesses going forward.
More than two-thirds of our small business audience told us they borrow from community banks. The Independent Community Bankers of America (ICBA) report they make almost 6 of 10 small business loans nationally, so our folks are a little more active with these lenders. Perhaps, since I’ve long espoused the natural symbiosis between Main Street businesses and community banks, I’ve influenced my polling audience to move this needle beyond the national average.
The big news of our poll is that crowdfunding popped up on the lending radar for the first time. The number was only 3%, but this credit source is very new.
Right now crowdfunding loans fit small businesses that aren’t bankable for one reason or another, but are strong enough to handle the associated higher interest rates. I predict over the next decade crowdfunding will claim a larger piece of the small business loan pie for three reasons:
1. Crowdfunding rates will become more competitive
2. It won’t have banking regulatory challenges
3. The virtual, online aspect of crowdfunding will appeal to the next generation of entrepreneurs
Recently I attended a convention of bankers and asked several of them what they knew about crowdfunding. Most had not heard the term, only a couple of those who had heard of crowdfunding knew how it worked and none understood the future implications to their industry.
Bankers, call your office.
Write this on a rock …
Small business borrowing will be a lot different in 2025.