Need a Bank Loan? The 3 Big Obstacles for Small-Business Owners. Banks are still struggling to return to the small-business market Here's what you need to know.

In the wake of the 2008 financial crisis, banks are struggling to return to the small-business market, according to Karen Mills, former administrator of the U.S. Small Business Administration. In a Harvard Business School working paper, Mills attributed the hesitation of banks to return to small-business lending to several factors:

• Small-business owners are less creditworthy today due to the recession
• Banks are more risk averse due to stricter regulations in place and increased costs
• Community banks, traditional sources of small-business loans, are being consolidated by big banks

1. Declining creditworthiness of business owners

Mills, senior fellow with the Harvard Business School and head of the SBA from 2009 to 2013, noted that Federal Reserve data show the income of a typical household headed by a self-employed person decreased by 19 percent from 2007 to 2010. In addition, collateral owned by small businesses (typically residential or commercial real estate) also lost value, she wrote. The net effect? Lower credit scores for small business owners.

2. Stricter regulations and rising costs for banks

Because loans to small businesses are traditionally riskier due to dependence on the state of the economy among other factors, banks are especially cautious, Mills said in her piece. Increasingly strict regulations placed on community banks and larger banks alike are only fueling the fire.

And while Federal Reserve Senior Loan Officer Surveys indicate some easing of loan terms for small businesses has occurred, it hasn't occurred as much as terms were tightened during and after the financial crisis, she noted.

In response to this environment, banks have been raising their capital reserves and holding onto deposits, decreasing the likelihood of underwriting small business loans, according to Mills.

Another factor that's not helping the lending environment for small business owners is that transactions costs to process these types of loans are comparable to larger commercial loans, but without the payoff. "Some banks, particularly larger banks, have significantly reduced or eliminated loans below a certain threshold… or simply will not lend to small businesses," said Mills. She added, "This is problematic as over half of small businesses survey are seeking loans of under $100,000, leaving a critical gap in the small business loan market."

3. Community bank consolidation

Generally, community banks have been key players in small business lending, Mills said, citing data that shows community banks approved 48 percent of small business loans, while larger institutions approved only 13 percent.

However, the number of community banks has decreased from 14,000 in 1985 to less than 7,000 today, reducing the number of options for small businesses, Mills said. She noted that the largest banks held over 80 percent of the nation's assets in 2012.

The end result of these trends, Mills said, is that small business owners are having to spend countless hours applying for loans at multiple institutions. She suggested that technology may be able to help banks or competitors address some of the issues related to risk and transaction costs.

In the meantime, other experts recommend that small business owners seek lenders that have developed a relationship-based focus for their lending efforts and work to build up their credibility and creditworthiness. As the recovery from the recession is slower coming to a close, it is also a possibility that conditions will improve for small-business lending.

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