Last year lending to small businesses evaporated with glaring exception of Wells Fargo which increased its lending through Small Business Administration (SBA) programs. With bank lending to small businesses nearly frozen many small businesses are scrambling for the credit lines and loans they need to keep their companies alive.

The landscape of lenders willing to provide credit to small business is evolving. Wells Fargo has emerged as the principal provider of credit to the small business market, becoming the number-one lender through the SBA loan programs during 2009.

CIT Group, JPMorgan Chase, Banco Popular and Bank of America have cut their SBA lending by more than 70% this year. While Wells Fargo buttressed by its acquisition of Wachovia, increased its loan volume 4%, from $583 million in 2008 to $605 million during 2009.

Wells Fargo acquisition of Wachovia closed three months into the 2009 fiscal year allowing Wells Fargo to book only nine months of Wachovia SBA lending which totaled $742 million a decrease of 24% from aggregate SBA loans extended during 2008. During 2009 the number two lender to small businesses was U.S. Bank which made $250 million in loans through the SBA’s lending program.

The large banking institutions that received TARP funds used that infusion to prop up the capital ratios to improve weak balance sheets. Little of these funds were used to fund credit programs for small businesses. Wells Fargo’s capital ratios were healthier then its larger competitors. This allowed Wells Fargo to take advantage of their rivals distraction from the small business market. Indeed the bankruptcy filing by CIT, the management tremors at Bank of America, Citibank’s scramble for capital and JP Morgan Chase digestion of Bear Stearns allowed Wells Fargo to fill the large vacuum in the neglected SBA lending market.

Wells Fargo also had the advantage of not being dependent on securitizing its SBA loans and selling them in the secondary market. As evidenced by CIT’s bankruptcy filing, funding for securitized loans disappeared as the risk aversion of institutional investors grew and liquidity evaporated from the market. These market events led Wells Fargo to develop a focused discipline on the small business lending market. The bank was committed to closing larger 7(a) SBA loans which are held and managed in the banks loan portfolio. Wells Fargo’s small business strategy discouraged originating SBA Express Loans that offer lower credit limits and tend to have much higher default rates. Wells Fargo’s SBA program and business model should be studied and replicated by community banks to energize small business lending.

Small business lending and capital formation in the sector is a critical component for sustainable economic growth. Banks need to engage the small business market with a deeper understanding of the risks associated with the market. Small business managers must demonstrate to bankers and shareholders that they are worthy stewards of credit and equity capital by implementing sound risk management and corporate governance practices. This assures bankers that small business managers are a good credit risk capable of building a mutually profitable business relationship for the many years to come.

Risk: SME, SBA, credit, small business, banking, community banks