As banks tighten business lending criteria, are we in for another Main Street credit crunch?
According to a recent article in American Banker, it’s crickets in the small business lending ecosystem. Of course, COVID-related uncertainty makes some business owners think twice about taking out a loan, but that’s not the whole story. Outside of PPP loans, approval rates in the small business lending industry have plummeted, driven by tighter lending standards, affecting the smallest businesses most.
The Federal Reserve’s Senior Loan Officer Opinion Survey for July found that 70% of lenders tightened underwriting standards for loans to small businesses. If the previous recession is any indication, these tightened lending standards will stay with us for far longer than the present coronavirus threat.
Small business lending exhibits procyclicality, meaning that when times are good, loans are easier to access. But when economic times are bad, banks and other lenders are slow to meet the needs of the recovery. Lenders may even prolong the crisis by preventing businesses from getting the capital they need, stalling business growth and job creation. Unless we begin building alternative approaches for businesses to access capital, we’re on the path to a painstakingly slow recovery and a world where creditworthy small businesses fall through the cracks.
What can we do about it?
Here at Honeycomb Credit, we think that alternatives to bank loans such as Community Development Financial Institutions (CDFIs), community loan funds, and investment crowdfunding platforms are going to be a critical part of the puzzle. CDFIs have often been called to the front lines to help Main Street businesses recover, acting as nonprofit economic shock absorbers during the Great Recession. Because they had a stake in their community, they lent limited funds as larger banks hunkered down -- planting the seeds for future recovery.
We think that investment crowdfunding, sometimes referred to as equity crowdfunding (even when referring to other investment vehicles) has a powerful role to play as well. Eight years ago, Congress passed the JOBS Act, a recession recovery bill that, among other things, made it possible for local businesses to publicly solicit investment through registered investment crowdfunding portals. The hope was that by turning everyday people into investors, we could create a more equitable capital landscape.
Four years since the first investment portals came live, investment crowdfunding is ready to help fight the credit crunch. By bringing a private market of retail investors ready to supply capital to Main Street small businesses, we can preserve jobs and invest in the growth of communities.
This isn’t just conjecture. With lending activity at its highest levels in Honeycomb history, we are seeing early signs that investment crowdfunding is not following the same trends as bank lending or online lending. Despite the economic uncertainty, creditworthy small businesses with community support are using investment crowdfunding to get a fair shot at accessing capital.
If the Great Recession is any indication, access to credit, driven primarily by the behavior of big banks and fintechs, is going to recede. Luckily we have been laying the groundwork for alternative tools that, with public and private support, can rise to the occasion. At least some element of the recovery is in our hands. And this time, everyone can play a role.
You can join the Invest Local movement and be a part of the solution at honeycombcredit.com/explore