Small business lending slow to recover

Small businesses often rely on local banks to obtain commercial loans.

Commercial and industrial loans smaller than $1 million have grown by 3 percent in 2014, but they remain about 17 percent lower than at their peak in mid-2008. According to Ann Marie Wiersch of the Federal Reserve Bank of Cleveland, there are two main reasons for this slow recovery: demand is down because small business as a whole hasn't returned to its previous high level, and lenders are less willing to grant loans to SMBs because they are less profitable.

Conversely, Wells Fargo small business manager Doug Case told the Asheville Citizen-Times that stricter documentation requirements on the part of federal regulators are behind the decrease. He says that the approval rates of the pre-recession months were abnormally high, and that today's numbers are close to those of a decade ago.

"For 100 years in America, community bankers who knew their market and their customers had been comfortable doing loans where they couldn't document every base," agrees HomeTrust Bancshares CEO Dana Stonestreet. "It was a judgment call based on local expertise. In today's regulatory market, that's all well and fine, but if you can't document all cash flows, forget all that. We can't make those decisions anymore. The paperwork has to be perfect."

Most bankers agree that entrepreneurs aren't being denied loans when they can provide the necessary documentary evidence to support their expectations of growth and prove that they understand how factors like shrinking profit margins can emerge even as sales increase. For lenders, commercial loan software can help track payments and reduce risk in today's more closely regulated small business lending landscape.