Big banks' reputations have taken a hit over the last few years, starting with the financial crisis and culminating with the Occupy Wall Street protests. Meanwhile, small businesses have been cast as the economy's earnest underdogs, generating rhetorical support from Congress to the campaign trail to Wall Street. So it's no surprise that Bank of America, Chase, Citibank and Wells Fargo were eager to release seemingly impressive small-business lending figures for 2011. Problem is, many of those loans may be going to businesses that aren't that small.
For lending purposes, the nation's four biggest banks define small businesses as those with annual revenues up to $20 million -- an amount far higher than many businesses on Main Street will ever reach. This could explain the ongoing disconnect between big banks' upbeat lending reports and the 61 percent of small-business owners who say it's harder to get loans now than four years ago, according to a study released Thursday by the American Sustainable Business Council, Small Business Majority and Main Street Alliance.
Sarwan "Rimpy" Singh, owner of seven Taco Time restaurants in the Portland, Ore., area, experienced the disconnect when two big banks rejected his application for a $300,000 loan to buy property he is leasing. One bank told Singh it doesn't give loans to restaurants because they're high-risk, though Singh has been in business for 16 years, has excellent credit, a sizable down payment and has been a longtime bank customer. Earning $2.5 million to $3 million in 2011 revenue, Singh said he wonders whether he's at the wrong end of the revenue spectrum when it comes to borrowing. "There are a lot of mixed messages from the big banks," he said. "That definition is completely wrong. They have no clue what a small business is."
In other words, big bank loans to so-called small businesses may very well be going to businesses closer to the $20 million end of the revenue spectrum. Without more transparency, it remains unknown.
"The big banks make their small-business lending numbers look as good as possible by stretching the limits as far as possible," said Ami Kassar, founder and CEO of Philadelphia-based MultiFunding, which helps small businesses find the best loans available to them. "They include companies with up to $20 million of revenue. These companies are less risky, and less complicated to lend to. They also require larger loans that make the big banks' total small-business lending numbers look much better."
Here's a snapshot of the banks' 2011 small-business lending figures -- to businesses with revenue of $20 million or less:
- Bank of America: $17.7 billion, a slight decrease from 2010.
- Chase: $17 billion, a 52 percent increase.
- Citibank: $7.9 billion, a 30 percent increase.
- Wells Fargo: $13.9 billion, an 8 percent increase.
Big banks' definition of small business also differs from that of government agencies that monitor small-business lending. These agencies tend to adopt the Federal Deposit Insurance Corp. call reports definition of small-business lending -- business loans in the amount of $1 million or less. Based on this definition, the Small Business Administration Office of Advocacy reported that total outstanding small-business loans fell 1.2 percent to $599.7 billion in the third quarter last year, from $606.9 billion in the second quarter, while small-business loans by the big banks were nearly flat for the same period.
The Federal Reserve and the Office of the Comptroller of the Currency have also adopted this inter-agency definition, though the Senior Loan Officer Opinion Survey published by the Fed defines small businesses as those with sales of $50 million or less. The Treasury Department does not have a definition of small businesses or small-business loans, but adheres to specific parameters for its two small-business lending programs, the State Small Business Credit Initiative, which targets borrowers with 500 employees or less with loan amounts not exceeding $5 million, and the Small Business Lending Fund, which offers business loans of $10 million or less to businesses with revenues up to $50 million.
Even small banks use a narrower definition of small businesses than the big banks. Umpqua Bank, a community bank serving Oregon, Washington, Northern California and Northern Nevada, defines small businesses as those with $1 million or less in annual revenue. Umpqua lent more than $328 million in 2011 to these small businesses.
To put the "small business" population in some perspective, of the 27,486,691 total businesses that filed taxes with the IRS in 2003, the most recent year for which statistics are available, 26,226,922 -- or more than 95 percent -- had less than $1 million in total revenues.
Bank of America, Chase, Citibank and Wells Fargo don't publicly break down small-business lending according to revenue. But Kassar has crunched the data the four banks reported for the quarterly FDIC call reports and found that these banks did not show increases in outstanding small-business loan balances from the end of 2010 to the third quarter of 2011.
The banks' outstanding small-business loan balances -- based on the standard of $1 million or less -- from the end of 2010 to Sept. 30, 2011 are:
- Bank of America: $31.16 billion, down from $33.3 billion.
- Chase: $24.5 billion, about the same as the end of 2010.
- CitiGroup: $7.6 billion, down from $7.7 billion.
- Wells Fargo: $37.8 billion, down from $40.1 billion.
Because decreases in outstanding balances could also reflect loans being paid off, it's almost impossible to compare apples to apples and determine how effective small-business lending programs are. If big banks broke down how these funds are distributed, the true state of small-business lending might be clearer, observers said.
Kassar isn't holding his breath. "If the big banks were to use this definition in their reporting to the public, there would be political and public outrage," he said. "The numbers in the FDIC call reports reflect a horrible record of large banks supporting small business throughout the recession."
So how did the banks come up with this $20 million revenue figure as a definition of small business? Although they're perfectly in sync about the threshold itself, there's no consensus where that number originated.
"In our experience, when a business hits about $20 million in annual revenue, the way they use financial services changes and they would probably be better served in our middle market banking group," said MaryJane Rogers, a Chase spokeswoman. "We have more than 2 million small-business clients at Chase, and they represent the spectrum of business size and scope."
Similarly, at Wells Fargo, "the way we define small business starts with the customer and our vision to help our customers succeed financially," said Marc Bernstein, Wells Fargo executive vice president of in charge of the small business segment. "Every small business is unique, and while businesses under $20 million in annual revenue vary widely, we have found that these businesses have characteristics that distinguish them from large businesses -- such as management/ownership structures, number of employees, operating models and financial needs. While there's no perfect definition, we believe the categorization of businesses with less than $20 million in annual revenue is a good representation of small business."
Raj Seshadri, head of small business lending for Citibank, disregarded the idea of using the FDIC call reports as a measuring stick for small-business lending performance. "Comparing the SBA small-business lending commitment number to the FDIC number is a case of apples and oranges," Seshadri said. "The FDIC tracks non-farm, non-residential commercial and industrial loans of $1 million or less. The loans are made to commercial enterprises that are not farms and the loans are not collateralized using residential real estate."
Seshadri said the SBA set the definition. "The Small Business Administration defined the small-business lending commitment last summer as capital provided to a business with annual revenues under $20 million," she said. "Under this definition, we made a commitment that we would extend $24 billion over 2011-2013 to American small businesses. We are happy to report that we exceeded the lending commitment we made in 2011 by $900 million. Regardless of these and other definitions, our mission remains clear -- we want to help small businesses grow by providing the banking services they need. This includes lending, where our goal is to responsibly get to 'yes' for as many small-business owners as possible. We are now working hard to meet and surpass our commitment for 2012."
(SBA spokesman Mike Stamler responded that the SBA has told banks they "could use their own internal size standards" for non-SBA loans.)
Bank of America declined to comment on its definition of small-business loans. Spokesman Don Vecchiarello noted, "We know how important small businesses are to the economy -- at both the national and local level. That's why we're working to help small businesses succeed through a wide range of efforts."
MultiFunding's Kassar said he sees the $20 million definition that big banks use for small-business lending -- and the disconnect between the big banks' optimistic statements and Main Street's sour experiences -- as having dire consequences. "Big banks use their inflated numbers to encourage small-business owners to come in and apply for loans, where they are met with slow and cumbersome loan processes," Kassar said. "This slows down innovation and jobs. It also frustrates and exasperates. It's not good for small business, and it's not good for the country."
UPDATE: Bank of America originally provided The Huffington Post with the figure of $6.4 billion for their small-business lending in 2011, a 20 percent increase from 2010. That was Bank of America's amount of new small-business credit originations, as opposed to its total small-business loan commitments -- including both new originations and renewals -- which totaled $17.7 billion in 2011.