Stacy Mitchell, senior researcher for the New Rules Project’s Community Banking Initiative, explains that the big banks constrict credit for small businesses while community banks do disproportionately more small businesses lending, and what to do to allow them to get the economy moving again.
Why is it that community banks do so much more small business lending than their big competitors? One reason is that big banks rely on computer models to determine whether to make a loan. Because the local market conditions and the circumstances surrounding each borrower and his or her enterprise are so incredibly varied, this standardized approach does not work very well when it comes to understanding the nuances of risk associated with a particular small business.
By drawing on qualitative information – getting to know the borrower, learning about the business, and understanding the local market – small banks can better assess risk and successfully make loans to a wider group of small businesses.
How much community banks lend to small businesses? See the charts below:
