Sunday, April 25, 2010

Small Business Credit Shifting Away from Traditional Bank Loans to Credit Cards

It is difficult to get timely data on small business loans outstanding. Banks are only required to break out small business loans from overall commercial loans once a year, in their June call reports. Although the information is several months old, looking at data from 2008 to 2009 shows a continuing shift away from traditional loans and lines of credit toward small business credit cards.

Banks have found that using traditional underwriting methods for smaller loans is not cost effective. These banks have turned to small business credit card automated decisioning tools to cheaply process credit applications.

As shown in Exhibit 1, overall small business loans outstanding fell only 4% from 2008 to 2009, but the number of loans outstanding fell almost 19%. (Click on image to enlarge)

Does this make sense? Actually it does if you think about the buzz about banks cutting back on credit cards, and especially the demise of Advanta, a leading small business credit card issuer. Small loans less than $100,000 are predominately issued through small business credit cards and represent almost 50% of total loans outstanding but more than 95% of total volume.

Also looking at Exhibit 1, you can see that large and medium small business loan dollars and number outstanding have held steady, while banks have strongly contracted the number of micro loans outstanding. Yes, Virginia, banks are restricting lending on credit cards.

1 comment:

  1. Stephen Perry, SunTrust BankApril 26, 2010 at 9:42 AM

    Small business owners are willing to pay a higher interest rate on credit cards for that processing convenience and no underwriting due diligence.