Académique Documents
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Business Lending: US
and UK
Karen Gordon Mills
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WHY WORRY ABOUT ACCESS TO CREDIT FOR SMALL BUSINESSES?
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
US Small Businesses
~5.2 Million
~28 Million
Sole
Proprietors
(~22M)
High
Growth
(~200K)
Employers*
(5.7M)
Supply
Chain
(~1M)
UK Small Businesses
Sole
Proprietors
(~3.3M)
Employers
(~1.9M)
Main Street
(~4M)
Note: Remaining 500,000 business are Non-Supplier Businesses in the Traded Sector
P2
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US: SMALL FIRMS HIT HARDEST IN CRISIS -- 60% OF JOB LOSSES
Quarterly Net Job Change by Firm
Size (000)
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)
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).
P3
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UK: JOB CREATION AT SMALL FIRMS ALSO HIT HARD DURING CRISIS
Percentage of Small Businesses Reporting Net Change in
Employment, Last 3 Months
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WORKED FOR PRESIDENT OBAMA AS HEAD OF SMALL
BUSINESS ADMINISTRATION (2009-2013)
P5
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RECORD SBA LOANS HAVE HELPED, BUT LIMITED MARKET REACH
SBA represents <10% of market, limiting broader market impact
$35
$30
$25
$20
$30.5
$30.3
$30.1
FY11
FY12
FY13
$25.0
$22.0
$18.0
$15
FY08
FY09
FY10
Source: Small Business Administration. 7(a) and 504 loan volume since Fiscal Year 2008. As of May 2014.
P6
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US: CREDIT FROZE DURING CRISIS, SLOW TO RECOVER FOR SMALL FIRMS
Net
Loosening
Net
Tightening
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US: BANK LOANS TO SMALL BUSINESSES FELL DRAMATICALLY
Loans fell 18% during and after crisis, only recently began
growing again
Small Business Loan Assets on Balance
Sheets ($ Billions)
Source: Federal Deposit Insurance Corporation, Call Report Data. As of January 2015
P8
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UK: BANK LENDING TO SMALL FIRMS FROZE IN CRISIS, YET TO RECOVER
20
15
10
5
0
-5
-10
British Bankers' Assoc Bank of England Business, Innovation & Skills Dept
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
P9
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US: STRUCTURAL PROBLEMS ALSO PLAGUE LOAN MARKET
Small banks supply about 40% of SME loans, but being
consolidated
1,800
14
1,600
Number of Community
Banks
12
1,400
10
8
6
4
2,000
1,200
14
1,000
800
12
9
600
7
400
200
1985.0
1990.0
1995.0
2000.0
Number of Community Banks
16
2005.0
2010.0
Average Bank Assets
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
P 10
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UK: LENDING TO SMALL FIRMS REMAINS HIGHLY CONCENTRATED
Others; 4%
Lloyds; 23%
Santander; 11%
HSBC; 11%
1999
Others; 7%
Santander; 4%Lloyds; 26%
HSBC; 18%
2013
Source: 1999 figures from CC, 2013 figures from Charterhouse release Q1 2013. Percentages may not sum to 100
because of rounding.
P 11
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FIRMS WANT SMALL LOANS, WHICH ARENT PROFITABLE FOR BANKS
39%
15%
10%
12%
5%
17%
14%
18%
0%
<50K
$50-100K
$100-250K
$250-500K
>$500K
Source: Federal Reserve (New York), Small Business Credit Survey, Fall 2013
P 12
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US: THREE INITIAL MODELS DEVELOPED BUT LINES ARE NOW BLURRING
InstitutionalDriven P2P
Marketplaces
Institutional
marketplaces,
sometimes referred to
as peer to peer
lenders, were initially
consumer-focused.
Now, greater emphasis
on small businesses.
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.
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
P 14
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UK: P2P MODEL DOMINATES SMALL BUSINESS LENDING
UK Peer to Peer Lending Market Share Business Focused
Platforms
Outstanding Loans
Thincats
Landbay
New Loans
Source: Data includes only members of P2PFA Source: P2PFA, Morgan Stanley Research.
P 15
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UK: P2P PLATFORMS ALSO SEEN AS GOOD VALUE AND EASY TO USE VS. BANKS, BUT LESS SECURE AND HIGHER RISK
P2P
Banks
Source: UK Alternative Finance Industry Report (Nesta 2014), Morgan Stanley Research
P 16
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US AND UK ONLINE LENDING GROWING RAPIDLY
Lending to Small Businesses, 2014 vs. 2020
Estimates, Billions
US Marketplace
UK
50
Marketplace
$47b
n
45
Online
lending
estimated to
be 16% of
issuance by
2020 vs. 3%
today
+47%
annua
l
growt
h
40
35
30
25
20
15
10
5
0
+55%
annual
growth
2014
9b
n
2020E
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US AND UK: ONLINE MARKETPLACE IS EVOLVING RAPIDLY
Sources of
Customers
Bank
Partnerships
Santander / RBS in
UK
Govt mandate in
UK?
Consortiums
BancAlliance in US
Traditional
Banks
Product
Account
Sources of Capital
Govt in UK via
Receivable /
British Business
Invoice Lending
Bank
Term Loans
Retail
Short-term Cash
Instl / Hedge
Advances
Fund
Traditional
Banks
Warehouse Lines
Loan Brokers
Syndication
Small business customer does not always know
what product will best meet their needsMarkets
P 18
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WHAT IS THE APPROPRIATE LEVEL OF REGULATION IN US MARKET?
Two views:
NEED FOR REGULATION
No current designated federal
regulator
Should there be one?
CFPB should implement Dodd Frank
1071
High costs
P 19
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UK APPROACH
Supportive Government
Environment
Providing funds through
Streamlined Regulatory
Environment
Single regulator:
Financial Conduct
Business Bank
regulation in U.S.
Principles-based
oversight
including capital
requirements
Investor protections,
Borrower protections:
clear, fair and not
misleading
P 20