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Why Not to Get a Small-Business Loan at a Big Bank

The Federal Reserve, when they release their small-business report, many times they're defining a small business as having revenue of $50 million or less. That data is hard to navigate because if you're lending money to a business with $30 million or $40 million worth of revenue, that's very different than lending money to a Main Street business that has a couple hundred thousand dollars in revenue.

It gets more confusing because the big banks love to tout their small-business lending reports for small businesses with revenue of $20 million or less. Again, if they're lending money to a company with $10 million or $15 million worth of revenue that's in a whole different department in the bank and a whole different story than lending to Main Street businesses.

The FDIC adds another level of confusion. They define revenue as businesses that have [loan] balance of $1 million or less. And the SBA has its own set of definitions about what constitutes a small business that I don't even pretend to understand.

On Banking Grades, we've chosen to use the data from the FDIC call reports because we think that's the most accurate indicator that is currently available of small-business lending.

So are big banks lending to small businesses?

Kassar: When you look at the data there for the big banks you see that their small-business lending is largely flat or down during the recession.

Between the fourth quarter and the first quarter, Citibank is down, Wells Fargo (WFC) is down in multiple balances, Chase is about even and Bank of America is up about half a percent for all of their holding companies under their corporate umbrellas. That's a completely different story from the images they portray in their press campaigns, in their advertising that they love to run about how friendly they are to small businesses and how they're honoring their commitment to the government. It bothers me that they place these ads out there and then the small businesses follow the ads and go to their branches and meet bureaucratic processes where people at the branches aren't empowered to make decisions.

So why aren't big banks lending to small businesses?

Kassar: There's a couple of reasons. Lending to small businesses, if you're not well organized, can be risky. Small-business loans are one of the riskiest loans to make. They're complicated, they take time and if you do them properly they're not easy to do. So the bigger and more complicated your bureaucracy is and the bigger and more complicated your decision-making system is, the harder it is to make small-business loans.

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