October 3, 2018
By Bob Coleman
Editor, C-Suite Wednesday
C-Suite Wednesday — SBA Loan Guarantee Critical for Startups by Large Banks says FDIC
Not surprisingly, a FDIC’s just-released study on small business lending confirms different credit underwriting standards for startup small business loans by large and small banks.
Less than 10% of large banks report using the same underwriting procedures for startups as for established small businesses — 39% of small banks use the same procedures.
Large banks are also much more likely than small banks to mention looking for guarantees as part of their additional underwriting process for startups. More than 60% of large banks say they explore an SBA guaranty.
Only 14% of small banks show particular interest in SBA support for startup loans.
Writes the FDIC:
The survey supports the understanding that small banks are relationship lenders and approach small business lending in a more flexible and customized, case-by-case way compared with large banks; and a result of this approach may be that less established firms are more likely to receive credit.
Small banks are found less likely than large banks to use minimum loan amounts on their top products or to rely on standardized loan products. And small banks are more likely than large banks to accept real estate collateral, a practice that is consistent with small banks’ having a more intimate knowledge of their local communities.
Further, small banks often lend to startups using the same underwriting criteria they use for established small businesses; alternatively, they often evaluate a wide set of additional information, including relationship-based soft information such as owner’s experience or the management team’s skills.
The survey also supports the understanding that large banks are transactional lenders and rely on standardization in their small business lending decision making, thus facilitating a high-volume, economies-of-scale business model and perhaps screening for more established firms—the ones most likely to meet the standards and to have the quantifiable data to show that they do.
Large banks are much more likely than small banks to evaluate business credit score, require minimum loan amounts, and use such standardized loan products as credit.
Read the report here: