The Big Banks’ Reputations
Big banks’ reputations have taken a hit over the last few years, starting with the financial crisis and culminating with the Occupy Wall Street protests. Meanwhile, small businesses have been cast as the economy’s earnest underdogs, generating rhetorical support from Congress to the campaign trail to Wall Street. So it’s no surprise that Bank of America, Chase, Citibank and Wells Fargo were eager to release seemingly impressive small-business lending figures for 2011. Problem is, many of those loans may be going to businesses that aren’t that small.
For lending purposes, the nation’s four biggest banks define small businesses as those with annual revenues up to $20 million, an amount far higher than many businesses on Main Street will ever reach. This could explain the ongoing disconnect between big banks’ upbeat lending reports and the 61 percent of small-business owners who say it’s harder to get loans now than four years ago, according to a study released in January of 2012 by the American Sustainable Business Council, Small Business Majority and Main Street Alliance.
Sarwan “Rimpy” Singh, owner of seven Taco Time restaurants in the Portland, the area experienced disconnect when two big banks rejected his application for a $300,000 loan to buy property he is leasing. One bank told Singh it doesn’t give loans to restaurants because they’re high-risk, though Singh has been in business for 16 years, has excellent credit, a sizable down payment and has been a longtime bank customer. Earning $2.5 million to $3 million in 2011 revenue, Singh said he wonders whether he’s at the wrong end of the revenue spectrum when it comes to borrowing. “There are a lot of mixed messages from the big banks,” he said. “That definition is completely wrong. They have no clue what a small business is.”
In other words, big bank loans to so-called small businesses may very well be going to businesses closer to the $20 million end of the revenue spectrum. Without more transparency, it remains unknown.
“The big banks make their small-business lending numbers look as good as possible by stretching the limits as far as possible,” said Ami Kassar, founder and CEO of Philadelphia-based MultiFunding, which helps small businesses find the best loans available to them. “They include companies with up to $20 million of revenue. These companies are less risky, and less complicated to lend to. They also require larger loans that make the big banks’ total small-business lending numbers look much better.”
Big banks’ definition of small business also differs from that of government agencies that monitor small-business lending. These agencies tend to adopt the Federal Deposit Insurance Corp. call reports definition of small-business lending — business loans in the amount of $1 million or less. Based on this definition, the Small Business Administration Office of Advocacy reported that total outstanding small-business loans fell 1.2 percent to $599.7 billion in the third quarter last year, from $606.9 billion in the second quarter, while small-business loans by the big banks were nearly flat for the same period.
The Federal Reserve and the Office of the Comptroller of the Currency have also adopted this inter-agency definition, though the Senior Loan Officer Opinion Survey published by the Fed defines small businesses as those with sales of $50 million or less. The Treasury Department does not have a definition of small businesses or small-business loans, but adheres to specific parameters for its two small-business lending programs, the State Small Business Credit Initiative, which targets borrowers with 500 employees or less with loan amounts not exceeding $5 million, and the Small Business Lending Fund, which offers business loans of $10 million or less to businesses with revenues up to $50 million.
Even small banks use a narrower definition of small businesses than the big banks. Umpqua Bank, a community bank serving Oregon, Washington, Northern California and Northern Nevada, defines small businesses as those with $1 million or less in annual revenue. Umpqua lent more than $328 million in 2011 to these small businesses.
To put the “small business” population in some perspective, of the 27,486,691 total businesses that filed taxes with the IRS in 2003, the most recent year for which statistics are available, 26,226,922 or more than 95 percent and less than $1 million in total revenues.