Additionally search costs in small business lending are high for both borrowers and lenders. It is difficult for qualified borrowers to find willing lenders and vice versa. Federal Reserve research finds that small business borrowers can spend almost hours on paperwork for bank loans and often apply to multiple banks. Successful applicants wait weeks or in some cases a month or more for the funds to actually be approved and made available.
Some banks are even refusing to lend to businesses within particular industries for example restaurants or below revenue thresholds of million. Perhaps most important small business Chinese Overseas America Number Data loans often defined as business loans below million are considerably less profitable than large business loans for several reasons including Small business lending is riskier than large business lending. to swings in the economy have higher failure rates and fewer assets to collateralize. Assessing creditworthiness of small businesses can be difficult due to information asymmetry. Little if any public information exists about the performance of most small businesses because they rarely issue publicly traded equity or debt securities. Many small businesses also lack detailed balance sheets use sparse tax returns and keep inadequate income statements.
Community banks have traditionally placed greater emphasis on relationships with borrowers in their underwriting processes but these relationships are expensive and have not in the past translated well to automated methods for assessing creditworthiness which are favored by larger banks. Costs of underwriting small business lending are also high due to heterogeneity of small businesses and the lack of a secondary market. Heterogeneity of small firms together with widely varying uses of borrowed funds have impeded development of general standards for assessing applicants for small business loans and have increased costs of evaluating such loans.