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March 28, 2015

Rising small business lending presents great opportunity

While small business lending fell sharply after the financial crisis, there are signs this crucial activity is gaining steam. This development presents banks with new opportunities, but banks should know the market has changed significantly, and many non-bank lenders have sprung up to fill the higher demand for small business loans, according to American Banker. 

Crucial need for strategy
Amid this situation, financial institutions might benefit from taking a strategic approach to making the most of the recent improvement in economic conditions, American Banker reported. Many borrowers may think of these banks as being hesitant when they have the opportunity to extend credit to small companies, and this perception could impact their lending business.

At the same time, banks have many other challenges to overcome, with the current regulatory environment widely regarded as particularly difficult. Some blame this onerous set of rules as being a major factor that has kept banks from meeting the demands of small businesses and pushed this lending to nonbank lenders.

Banks face myriad challenges
The non-bank lenders have been quick to point out these challenges, stating that the difficult regulatory environment, along with sluggish adoption of new technologies and consolidation, have seriously undermined the ability of banks to meet the demands of fledgling companies, according to American Banker.

One industry expert who has noted these particular difficulties is Ryan Sullivan, a co-founder and partner at Kansas City-based small business lender CapFusion, American Banker reported. He stated that because of more stringent regulations and a "hive of other issues," banks are now "highly apathetic" when it comes to granting credit to smaller enterprises.

However, Sullivan has the foresight to realize that government agencies will eventually create more stringent regulations for non-bank lenders, according to American Banker. When making this prediction, he pointed to the sector's robust expansion, and forecast that this year, his startup company will fund more than $25 million worth of loans.

"The niche is growing so quick," Sullivan told American Banker. "Bad actors are beginning to come into the space. We're going to have to start policing ourselves, or the government will do it for us."

Opportunities for banks
While banks might think of alternative lending's rapid growth as providing competition, they may be better off focusing on the opportunity that lies within this particular sector. 

Instead of competing against these non-bank lenders, financial institutions can potentially work with these organizations, purchasing loan portfolios that meet their guidelines. One way banks can increase the odds of setting up the best possible partnerships is by working with Garnet Capital Advisors, a loan sale advisory firm with experience spanning many different types of debt. Garnet Capital has set up many banks with originators that help banks bolster their loan portfolios. Garnet understands the new markets and has decades of experience in banking so they are able to tailor partnerships that benefit both parties.