Banking in Kansas City: Capital Concerns

Bank lending is up since the Great Recession, but access to traditional means of borrowing are proving more elusive than ever for small business. Is the SBA big enough to fill the gap?

Various small-business associations conduct annual surveys to assess the biggest shared concerns of their members, and almost universally in recent years, the list has been topped by “access to capital.” And that may be, for the smallest among them.

For others, though, FDIC statistics show that banks headquartered in the Kansas City area increased the size of their portfolios for net loans and leases by nearly 50 percent between the end of the Great Recession and the start of this year.

The impact of that has been con-siderable: From a post-recession base of $36.7 billion, that aggregate lending by more than 90 banks swelled to $54.8 billion in 2018. Clearly, somebody has access to capital from traditional lending sources. Part of the challenge for smaller companies seeking operating cash is that today’s banking system and lend-ing protocols serve as disincentives to make smaller loans: The administrative costs for a $100,000 loan aren’t substantially less than for a $1 million loan, and bankers are more inclined to fish in the larger pond.

Brayden McCarthy, an executive with New York-based Fundera, zeroed in on the changing small-business lend-ing dynamic with an on-line analysis. Once focused on community, he wrote, many banks have adopted a Fed-focused posture, placing less emphasis on small-business lending. He backed that up with eye-opening numbers: banks reject 80 percent of small business owners seeking loans, and that since the mid-1990s, small business loans have gone from about half of bank loans to less than 30 percent. How does that impact potential bor-rowers?

“The average small business owner has to approach multiple banks and spend about three to four full days of man hours filling out applications before they can find a bank willing to lend to them,” he wrote. “So, instead of catalyzing the recovery, bank credit markets are choking off growth and job creation for some small businesses.”

One positive for small business owners has been the increase in lending capacity through the Small Business Administration, which nearly doubled its 7(a) program lending from 2010 to 2018, going from $14.9 billion to more than $25.5 billion last year. In the Kansas City region, that has yielded an aggregate $1.1 billion in small business loans since the Great Recession.

Ingram’s discerned that figure from a data set of every SBA loan approved in the nation since 2009, defining loans in this region as those made to organizations using local addresses.

While it’s not 100 percent certain that the money was applied to operations outside this market, SBA Region VII director Tom Salisbury said those figures were consistent with the agency’s lending patterns nationwide. “Our numbers are reflective of what’s going on around the country,” he said. “But it’s worth saying: We are kind of counter-cyclical. When the economy is good, our numbers have a tendency to go down. And there’s a reason for that: It’s because we are kind of the lender of last resort, which is OK—we’re happy with that. Our mission is to try to make sure everybody who wants to pursue the American dream has a chance. But we’re most happy when lenders in the marketplace are able to make loans themselves.”

While an aggregated $1.1 billion isn’t insignificant, it still pales next to nearly $55 billion on the books of local-ly based banks for 2018. Still, it is money that focuses on smaller businesses and smaller loans, while the overall
banking figures are distorted by lending to comparatively large enterprises.

The SBA, Salisbury says, is com-mitted to helping banks mitigate risk to keep the loan, the relationships and even the business itself all in their respective communities, “however you define that community: Kansas City, Rolla or Kennett, that’s our goal.”

The biggest driver of increased lending for the region, Salisbury said, was coming from rural areas, where community banks under pressure with other regulatory challenges simply aren’t positioned to absorb a potential loss. For the broader area, Salisbury noted, SBA activity translates into either new jobs or jobs that might have been at risk with companies struggling to remain solvent.

Last year, he noted, the 7(a) program recorded 1,775 jobs created as a result of the SBA’s lending, and even more than that retained—all told, more than 3,800 jobs, roughly the employment footprint of another UMKC. Looking ahead, Salisbury said, the SBA is attempting to evolve to correspond with the marketplace.

“Exporting has absolutely exploded; we’re now doing things in the export environment that we didn’t do in years before, but that’s a function of the marketplace.” The agency is also partnering with the USDA, whose programs for financial assistance often preclude operations metro areas of more than 50,000 residents, to leverage the strengths and charges of each agency.

“They’ve got more population, we have dollars,” Salisbury said. “We can make loans where they have restrictions. We don’t want businesses in rural areas leaving the community to find a lending insti-tution to make a loan for their small businesses. Those lending institutions have skin in the game to keep that loan in the community, and we’re embarking on a very vigorous program to get that message out.”