As Banks Recede from Small Business Lending, Community Lenders Step in to Fill the Gap
The Support Center released a report yesterday titled “Small Business Lending in North Carolina: The Increasing Role of Community Lenders,” which examines small business lending patterns of banks, Community Development Financial Institutions (CDFIs), Community Development Credit Unions (CDCUs), and credit unions in the state (we previously posted about this on our blog here). As large banks recede from small business lending, the report shows that community-based lenders have been stepping in to try to fill the lending gap, particularly in low-wealth communities where, in many cases, the small businesses they serve have been turned away from mainstream banks. Specifically, the report found that:
- Banks invest 250 times more, in terms of small business lending, in upper income census tracts than in lower income tracts
- By contrast, CDFIs invest 40 percent more, in terms of small business lending, in lower income census tracts than in upper income tracts
- CDFIs invest 26 percent of their lending resources in low- and moderate-income census tracts, compared to 16 percent by large banks
- 72 percent of the loans made by CDFIs are under $100,000, while 87 percent are under $1 million
At a time when North Carolina’s unemployment remains high and many of our local economies are still struggling, the state should support all avenues of creating jobs and wealth– which is what CDFIs, CDCUs, and credit unions are working toward in communities across the state. But because many of them are much smaller institutions, compared to banks, they need additional public and private support in order to meet the growing demand for affordable capital. The report outlines three ways that community lenders can be supported:
- Investments, in the form of deposits or secondary capital, would increase the portfolios of community lenders and allow them to leverage greater funds for small business lending.
- Policy changes, such as increasing the 12.25 percent cap on the amount of lending credit unions can do, or raising the $50,000 maximum on business loans for credit unions, would allow CDCUs and credit unions to increase their small business lending volume and reach more borrowers.
- Grants would support community lenders’ capacity to for outreach, financial education, training, as well as maintaining branches and personnel to get their financial services and products out into the community.
While traditional banks are able to provide loans to many entrepreneurs, community lenders support those businesses that are outside the financial mainstream. With these supports, community lenders would be able to expand their reach and help fund more entrepreneurs in North Carolina. By targeting these different markets, banks, CDFIs, CDCUs, and credit unions can together meet the capital needs of a wider range of small businesses, create jobs, and ultimately get more people to work.
The full report can be downloaded here.