An article on WSJ.com today discussed the second look program that large banks have put in place in order to approve more small business loans. From the public’s perspective, this is a positive initiative because it will mean more small business loan approvals. However, if you take a deeper look at what the program is, you notice that it really doesn’t address the major issues that small businesses face. The banks don’t have the capability to efficiently dig deeper into the true health of a business, their cash flow, or their revenue. Instead, it seems like they are mostly giving the small business owner a second chance to make sure their credit report doesn’t have any errors.
As we know, the major issues in the lending system are not errors in credit reports; it is the fact that to the banks, the credit report (not the financials of a business) is the most important piece of the puzzle. This is a result of a system where (until On Deck) there has not been an efficient way banks to quickly analyze the true health of a Main Street business.
The article mentions one of the main reasons banks focus on the credit score – the low cost: “The deeper analysis can cost hundreds of dollars or more, compared with $30 to $50 for a loan analysis based on credit scores.” The reliance on the personal credit
So while there will be additional small businesses that receive loans because of the second look program, some feel the real point of the program is PR:“William Dunkelberg, chief economist of the National Federation of Independent Business, a trade group for small businesses, says the moves ‘can’t hurt,’ but believes second-look programs are aimed more at rehabilitating banks’ public-relations image than at making new loans.”
The restaurant that becomes a nationwide chain employing thousands of Americans starts as a small business in need of capital to grow. Until the banks find a way to efficiently analyze small businesses and provide capital to Main Street, these businesses – and the economy will be held back.