This quarter, Retail Insights looks at two interesting trends that seem to be converging. The first is an increase in small business lending, with a focus on how lenders are rethinking their lending criteria. In the long run, this will make it easier for many small businesses to secure loans to relocate and expand within our districts. The other is a growing interest from big box retailers looking to test ‘small boxes’ as a way to make a dent in urban markets. Both spell opportunity for commercial district managers seeking to attract and expand businesses within their districts.
Small Business Lenders Revisit Character
One of the things that prevented small business expansio
n over the past few years has been the inability to finance growth during the recession. This is because fe
wer banks were making loans as underwriting criteria got much more stringent. As a result, small business often suffered the most – their loans are notoriously among the most difficult to make and underwrite.
In the past, local banks had personal relationships with businesses owners and made lending decisions based on a number of factors – but most important was often the customer relationship. As the banking industry grew and those relationships eroded, small business loans were more frequently made based on the business owner’s personal credit score, with real estate used as collateral for the loan. In the past few years, real estate values have collapsed, which meant that so too did a small business owner’s ability to borrow against their asset. The good news is that there are some indications that banks are beginning to open their purses a bit and loan to small businesses. The Wall Street Journal recently covered the issue [“Banks Get Back to the People Business”, WSJ, 3/7/11] and found that more and more banks are looking beyond a small business owner’s personal credit score during the underwriting process. The American Bankers Association has begun creating educational programs for bankers on how to analyze a borrower’s character and use that analysis in their loan applications. For example, banks have begun to look at how businesses have survived the recession as an indicator of credit worthiness. This is great news because as businesses look to relocate, grow, or expand within your districts, they will have more access to the capital necessary to do so. Another implication of this trend is that district managers can begin thinking about how to helping establish and deepen relationships between local banks and local businesses through networking events and partnerships.