St State of Sm Small Business Le Lending: US US and UK UK Karen Gordon M 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 OOC OOCTOB OBER 2015
DRAFT DR DRAFT DR 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 UK S Small B Businesses US S Small Businesses ~5.2 Million ~28 Million Sole Proprietors Employers Sole Proprietors Employers* (~3.3M) (~1.9M) (~22M) (5.7M) High Growth Supply Chain Main Street (~200K) (~1M) (~4M) Note: Remaining 500,000 business are Non-Supplier Businesses in the Traded Sector P 2
DRAFT DR DRAFT DR US: SMALL FIRMS HIT HARDEST IN CRISIS -- 60% OF JOB LOSSES Quarterly Net Job Ch Qu Change by Fi Firm Size (‘ (‘000) 1500 1500 1000 1000 500 500 0 -500 500 -1000 1000 -1500 1500 -2000 2000 93 94 93 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 Sm Small (<500 Employees) Medium (500-999 Me 999 Employees) La Large (1000+ 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). P 3
DRAFT DR DRAFT DR UK: JOB CREATION AT SMALL FIRMS ALSO HIT HARD DURING CRISIS Pe Percentage of Small Businesses Reporting Net Change in Employment, Last 3 Months 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% 2% -4% 4% -6% 6% -8% 8% -10% 10% 1Q10 1Q 10 3Q 3Q10 10 1Q 1Q11 11 3Q 3Q11 11 1Q12 1Q 12 3Q 3Q12 12 1Q 1Q13 13 3Q 3Q13 13 1Q 1Q14 14 3Q14 3Q 14 1Q 1Q15 15 3Q 3Q15 15 Source: Federation of Small Businesses (October 2015) P 4
DR DRAFT DR DRAFT WORKED FOR PRESIDENT OBAMA AS HEAD OF SMALL BUSINESS ADMINISTRATION (2009-2013) P 5
DRAFT DR DRAFT DR RECORD SBA LOANS HAVE HELPED, BUT LIMITED MARKET REACH § SBA represents <10% of market, limiting broader market impact $35 $35 SBA lending up two-th SB thirds from th the crisis, bringing back 1,000 lenders, helped by new legislation and an agency-wide initiative to cut paperwork $30 $30 Loan Volume ($ billions) $25 $25 $30.5 $30.3 $30.1 $20 $20 $25.0 $25. $22. $22.0 $18. $18.0 $15 $15 FY FY08 FY FY09 FY FY10 FY11 FY FY FY12 FY FY13 Source: Small Business Administration. 7(a) and 504 loan volume since Fiscal Year 2008. As of May 2014. P 6
DR DRAFT DR DRAFT US: CREDIT FROZE DURING CRISIS, SLOW TO RECOVER FOR SMALL FIRMS Per ercen entage e of of Ba Bankers Rep eporting Net et Tig ightenin ing or or Lo Loosening of of Lo Loan Con ondition ons 80% 80% 70% 70% Net Tightening 60% 60% 50% 50% 40% 40% Ne 30% 30% 20% 20% 10% 10% Net Loosening 0% 0% -10% 10% -20% 20% 200 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 Ne Tightening Standards (Large Businesses) Ti Ti Tightening Standards (Small Businesses) Source: Federal Reserve, “ Senior Loan Officer Survey ” as of July 2015. P 7
DR DRAFT DR DRAFT US: BANK LOANS TO SMALL BUSINESSES FELL DRAMATICALLY § Loans fell 18% during and after crisis, only recently began growing again Sm Small Business Loan Assets on Balance Sh Sheets ($ Billions) 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 Source: Federal Deposit Insurance Corporation, Call Report Data. As of January 2015 P 8
DR DRAFT DR DRAFT UK: BANK LENDING TO SMALL FIRMS FROZE IN CRISIS, YET TO RECOVER Per ercen entage e Changes es in Small Busines ess Len ending on a Yea ear Earlier er 20 15 10 5 0 -5 -10 Mar 08 Mar 09 Mar 10 Jun 10 Mar 11 Mar 12 Mar 13 Jun 08 Sep 08 Dec 08 Jun 09 Sep 09 Dec 09 Sep 10 Dec 10 Jun 11 Sep 11 Dec 11 Jun 12 Sep 12 Dec 12 Jun 13 Sep 13 Dec 13 Business, Innovation & Skills Dept Bank of England British Bankers' Assoc 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 P 9
DRAFT DR DRAFT DR US: STRUCTURAL PROBLEMS ALSO PLAGUE LOAN MARKET § Small banks supply about 40% of SME loans, but being consolidated Number of Nu f Community Banks (Left ft Axis) vs. Average Bank Assets (Right Axis) 16 2,000 1,800 14 1,600 12 Average Bank Assets ($ billions) Number of Community Banks 1,400 10 1,200 8 1,000 14 800 6 12 600 9 4 8 7 7 400 2 200 0 0 1985 1990 1995 2000 2005 2010 Number ¡of ¡Community ¡Banks 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
DRAFT DR DRAFT DR UK: LENDING TO SMALL FIRMS REMAINS HIGHLY CONCENTRATED § About 90% of small firm loans are provided by largest banks in UK Volume Shares of Small Business Loans in England and Wales, 1999 vs. 2013 Ot Othe hers Santander Sa 4% 4% 4% 4% Othe Ot hers 7% 7% Santander Sa Lloyds Ll Ll Lloyds 11% 11% 23% 23% 26% 26% HS HSBC HS HSBC 18% 18% 11% 11% Barclays Ba RB RBS Barclays Ba RBS RB 22% 22% 29% 29% 19% 19% 26% 26% 1999 2013 Source: 1999 figures from CC, 2013 figures from Charterhouse release Q1 2013. Percentages may not sum to 100 because of rounding. P 11
DRAFT DR DRAFT DR US AND UK ONLINE LENDING GROWING RAPIDLY Lending to Small Businesses, 2014 vs. 2020 Estimates, Le , Billions US Marketplace UK Marketplace 50 50 $47 47bn 50 50 45 45 On Online lending 45 45 estimated es ed to be e 40 40 40 40 16% of 16% f is issuance by 2020 vs. 3% by 35 35 35 35 today to 30 30 30 30 25 25 25 25 20 20 20 20 +47% +4 7% annual an al 15 15 15 15 +55% +55% gr growth £9b £9bn annual an al 10 10 10 10 gr growth 5 5 0 0 2014 20 14 2020E 2020E 2014 20 14 2020E 2020E Source: Company data, Morgan Stanley research estimates. P
DRAFT DR DRAFT DR US: THREE INITIAL MODELS DEVELOPED – BUT LINES ARE NOW BLURRING Institutional-Driven Borrower-Driven Balance Sheet P2P Marketplaces Broker Marketplaces Lenders Connect small business Use balance sheet capital Institutional marketplaces, borrowers to a series of from institutional investors sometimes referred to as lenders that are part of their and decisions loans via “peer to peer” lenders, were online marketplaces; most proprietary risk scoring initially consumer-focused. work with conventional algorithms that rely largely Now, greater emphasis on lenders like big and small on cash flow data. small businesses. banks, SBA lenders as well as alternative lenders. Source: Authors’ analysis P 13
DR DRAFT DR DRAFT US ONLINE LENDING ECOSYSTEM P 14
DR DRAFT DR DRAFT UK: P2P MODEL DOMINATES SMALL BUSINESS LENDING 70% 70% UK Peer to Peer Lending Market Share – Business Focused Platforms 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Fu Funding Ci Circle Le LendInvest Ma MarketInvoice Th Thincats La Landbay Ou Outstanding Loans Ne New Loans Source: Data includes only members of P2PFA Source: P2PFA, Morgan Stanley Research. P 15
DRAFT DR DRAFT DR DRAFT DR UK: P2P PLATFORMS ALSO SEEN AS GOOD VALUE AND EASY TO USE VS. BANKS, BUT LESS SECURE AND HIGHER RISK 35% 35% UK Public Perception of P2P Lenders vs. Traditional Banks 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% Socially So y Fl Flexibility Value for Va Easy to Use Su Ea Sustainable Tr Trust Security Se Le Least Risky Re Responsible Mo Money P2P P2 Ba Banks Source: UK So UK Al Alternative Finance Industry Report (Ne Nesta 2014) 2014), Morgan Stanley Research P 16
DRAFT DR DRAFT DR US AND UK: ONLINE MARKETPLACE IS EVOLVING RAPIDLY Sources of Customers Product Sources of Capital § Bank Partnerships Ba § Ac Account Re Receivable / § Gov’t ’t in UK v via British Santander / / R RBS i in UK § In Invoice L Lending Business B Bank Gov’t ’t mandate i in UK? § § Term L Loans § Re Retail § Consortiums Co § Short-term C Sh Cash § Inst’l In ’l / H Hedge F Fund BancAlliancein Ba in US § Ad Advances § Tr Traditional Banks § Traditional Banks Tr § Wa Warehouse Lines § Lo Loan Br Brokers § Sy Syndication Markets Small business customer does not always know what product will best meet their needs P 17
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