State of Small Business Lending: US and UKKaren Gordon Mills Senior Fellow, Harvard Business School & Harvard Kennedy School Former Administrator of the U.S. Small Business Administration and Member of President Barack Obama’s Cabinet
OOCTOBER 2015
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WHY WORRY ABOUT ACCESS TO CREDIT FOR SMALL BUSINESSES?
2
US Small Businesses
Main Street(~4M)
High Growth(~200K)
Supply Chain(~1M)
~28 Million
Sole Proprietors(~22M)
Employers*(5.7M)
UK Small Businesses
~5.2 Million
Sole Proprietors(~3.3M)
Employers(~1.9M)
§ US: small firms produce half of private jobs, two-thirds of net job creation
§ UK: small firms account for half of private jobs, 65% of net job creation
Note: Remaining 500,000 business are Non-Supplier Businesses in the Traded Sector
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US: SMALL FIRMS HIT HARDEST IN CRISIS -- 60% OF JOB LOSSES
3
Source: Bureau of Labor Statistics, Business Dynamics Statistics (latest as of 4Q14). Chart shows the change in the number of charges by firm size, specifically “small businesses (firms with fewer than 500 employees) and large businesses (firms with more than 500 employees).
Quarterly Net Job Change by Firm Size (‘000)
-2000
-1500
-1000
-500
0
500
1000
1500
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Small (<500 Employees) Medium (500-999 Employees) Large (1000+ Employees)
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UK: JOB CREATION AT SMALL FIRMS ALSO HIT HARD DURING CRISIS
4
Source: Federation of Small Businesses (October 2015)
Percentage of Small Businesses Reporting Net Change in Employment, Last 3 Months
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15
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5
WORKED FOR PRESIDENT OBAMA AS HEAD OF SMALL BUSINESS ADMINISTRATION (2009-2013)
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RECORD SBA LOANS HAVE HELPED, BUT LIMITED MARKET REACH
6
Source: Small Business Administration. 7(a) and 504 loan volume since Fiscal Year 2008. As of May 2014.
§ SBA represents <10% of market, limiting broader market impact
$25.0
$18.0
$22.0
$30.5 $30.3 $30.1
$15
$20
$25
$30
$35
FY08 FY09 FY10 FY11 FY12 FY13
SBA lending up two-thirds from the crisis, bringing back 1,000 lenders, helped by new legislation and an agency-wide initiative to cut paperwork
Loan
Vol
ume
($ b
illio
ns)
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US: CREDIT FROZE DURING CRISIS, SLOW TO RECOVER FOR SMALL FIRMS
7
Source: Federal Reserve, “Senior Loan Officer Survey” as of July 2015.
Net
Tig
hten
ing
Net
Loo
seni
ng
Percentage of Bankers Reporting Net Tightening or Loosening of Loan Conditions
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Tightening Standards (Large Businesses) Tightening Standards (Small Businesses)
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US: BANK LOANS TO SMALL BUSINESSES FELL DRAMATICALLY
8
Source: Federal Deposit Insurance Corporation, Call Report Data. As of January 2015
Small Business Loan Assets on Balance Sheets ($ Billions)
0
100
200
300
400
500
600
700
800
02 03 04 05 06 07 08 09 10 11 12 13 14 15
§ Loans fell 18% during and after crisis, only recently began growing again
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UK: BANK LENDING TO SMALL FIRMS FROZE IN CRISIS, YET TO RECOVER
9
Source BIS: Monthly BIS survey and Bank calculations. Lending by four UK lenders to enterprises with annual bank account debit turnover less than £25 million. Survey ended December 2012.Source BOE: Lending by UK monetary financial institutions to UK SMEs with annual debit account turnover on the main business account less than £25 million. Data is through February 2014.BBA Source: Lending by a BBA panel of lenders to SMEs in Great Britain. SMEs are defined as businesses with turnover up to £25 million. Data is through December 2013
-10
-5
0
5
10
15
20
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun
10
Sep
10
Dec
10
Mar
11
Jun
11
Sep
11
Dec
11
Mar
12
Jun
12
Sep
12
Dec
12
Mar
13
Jun
13
Sep
13
Dec
13
Business, Innovation & Skills Dept Bank of England British Bankers' Assoc
Percentage Changes in Small Business Lending on a Year Earlier
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US: STRUCTURAL PROBLEMS ALSO PLAGUE LOAN MARKET
10
Source: Federal Deposit Insurance Corporation, Call Report Data. As of January 2015. * Per reports from the FDIC Acting Chairman Martin Gruenberg and a December 2012 survey of small business finances conducted by the Federal Reserve Bank of Atlanta
1412
9 8 7 7
02004006008001,0001,2001,4001,6001,8002,000
0
2
4
6
8
10
12
14
16
1985 1990 1995 2000 2005 2010Number of Community Banks Average Bank Assets
Aver
age
Bank
Ass
ets
($ b
illion
s)
Number of Community Banks (Left Axis) vs. Average Bank Assets (Right Axis)
§ Small banks supply about 40% of SME loans, but being consolidated
Num
ber
of C
omm
unity
Ban
ks
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UK: LENDING TO SMALL FIRMS REMAINS HIGHLY CONCENTRATED
11
Source: 1999 figures from CC, 2013 figures from Charterhouse release Q1 2013. Percentages may not sum to 100 because of rounding.
Lloyds23%
RBS29%
Barclays22%
HSBC11%
Santander11%
Others4%
Lloyds26%
RBS26%
Barclays19%
HSBC18%
Santander4%
Others7%
Volume Shares of Small Business Loans in England and Wales, 1999 vs. 2013
1999 2013
§ About 90% of small firm loans are provided by largest banks in UK
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US AND UK ONLINE LENDING GROWING RAPIDLY
Source: Company data, Morgan Stanley research estimates.
0
5
10
15
20
25
30
35
40
45
50
2014 2020E0
5
10
15
20
25
30
35
40
45
50
2014 2020E
US Marketplace UK Marketplace
Online lending estimated to be 16% of issuance by 2020 vs. 3% today
Lending to Small Businesses, 2014 vs. 2020 Estimates, Billions
+47% annual growth +55%
annual growth
£9bn
$47bn
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US: THREE INITIAL MODELS DEVELOPED – BUT LINES ARE NOW BLURRING
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Source: Authors’ analysis
Borrower-Driven Broker Marketplaces
Connect small business borrowers to a series of lenders that are part of their online marketplaces; most work with conventional lenders like big and small banks, SBA lenders as well as alternative lenders.
Institutional-Driven P2P Marketplaces
Institutional marketplaces, sometimes referred to as “peer to peer” lenders, were initially consumer-focused. Now, greater emphasis on small businesses.
Balance Sheet Lenders
Use balance sheet capital from institutional investors and decisions loans via proprietary risk scoring algorithms that rely largely on cash flow data.
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US ONLINE LENDING ECOSYSTEM
14
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UK: P2P MODEL DOMINATES SMALL BUSINESS LENDING
15
Source: Data includes only members of P2PFA Source: P2PFA, Morgan Stanley Research.
0%
10%
20%
30%
40%
50%
60%
70%
Funding Circle LendInvest MarketInvoice Thincats Landbay
Outstanding Loans New Loans
UK Peer to Peer Lending Market Share – Business Focused Platforms
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UK: P2P PLATFORMS ALSO SEEN AS GOOD VALUE AND EASY TO USE VS. BANKS, BUT LESS SECURE AND HIGHER RISK
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Source: UK Alternative Finance Industry Report (Nesta 2014), Morgan Stanley Research
UK Public Perception of P2P Lenders vs. Traditional Banks
0%
5%
10%
15%
20%
25%
30%
35%
Socially Responsible
Flexibility Value for Money
Easy to Use Sustainable Trust Security Least Risky
P2P Banks
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US AND UK: ONLINE MARKETPLACE IS EVOLVING RAPIDLY
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Sources of Customers Product Sources of Capital
Small business customer does not always know what product will best meet their needs
§ Bank Partnerships§ Santander / RBS in UK
§ Gov’t mandate in UK?
§ Consortiums§ BancAlliance in US
§ Traditional Banks
§ Loan Brokers
§ Account Receivable /
Invoice Lending
§ Term Loans
§ Short-term Cash
Advances
§ Gov’t in UK via British
Business Bank
§ Retail
§ Inst’l / Hedge Fund
§ Traditional Banks§ Warehouse Lines
§ Syndication Markets
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WHAT IS THE APPROPRIATE LEVEL OF REGULATION IN US MARKET?
NEED FOR REGULATION
§ No current designated federal regulator§ Should there be one?
§ CFPB should implement Dodd Frank 1071
§ Lack of transparency on costs to small business owners
§ Concern that this might be the next ‘subprime market’§ Emergence of loan brokers
§ High costs
IMPROVE EXISTING REGULATION/ ENCOURAGE MARKET MECHANISMS
§ Clarify and streamline existing state and SEC regulatory oversight
§ Let nascent market develop§ Current industry move to improve
transparency§ Borrowers’ Bill of Rights
§ Consistent disclosure of cost metrics
§ Internal industry oversight increasing on loan brokers
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Two views:
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UK APPROACH
19
Supportive Government Environment
§ Providing funds through platforms
via British Business Bank
§ Tax free allowances for ISA
investments in P2P platforms
§ Results of Competition and Markets
Authority 2016 study on small
business lending in UK
§ Potential support for referrals of
declines to P2P lenders
Streamlined Regulatory Environment
§ Single regulator: Financial
Conduct Authority vs. overlapping
regulation in U.S.
§ Principles-based oversight
§ Investor protections, including
capital requirements
§ Borrower protections: “clear, fair
and not misleading”
