Historically, local banks have been the closest ally of small and medium sized businesses (SMBs), as relationship building and community reinvestment tend to be closely held values in making lending decisions. However, the SMB lending landscape has changed significantly in the past few years due to two unrelated, but important factors:
- The total number of banks in the US has declined by over 60% since 1985, and the majority of those closings have been in smaller, regional or local banks.
- In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, the largest regulatory reform in the financial services industry since The Great Depression.
Despite its positive intent, Dodd-Frank impacts all banks by imposing greater compliance requirements, causing increased personnel costs and larger capital reserves against riskier loans.
This isn’t a burden for big banks, but it certainly is for a community bank without sufficient budget to support additional overhead (the entire US financial sector is estimated to have spent $24 million additional man-hours on Dodd-Frank compliance in 2013 alone). The ripple effect to consumers is a reduced appetite for smaller loans (especially those under $250K) and less tolerance for riskier loans (small businesses often fall in this bucket). It’s important to note that these community lenders often want to lend to your business, but they are simply unable to do so because of their increased expenses and your current risk profile.
But there is good news in all of this – things are also changing for the better. With the burgeoning P2P lending movement small businesses have access to crowdsourced lenders like Dealstruck who don’t face those same pressures, allowing us to say yes when others cannot. A financing platform with economies of scale and sophisticated, flexible risk profiling can deliver much-needed capital with a speed and scale that simply didn’t exist a few years ago.
As the Greek philosopher Heraclitus said, “Everything changes and nothing remains still.” As a small business owner you deal with uncertainty every day, and here at Dealstruck we are happy to provide a bedrock of financial support.