One of the greatest drivers of the U.S. economy are the small businesses located in communities around the country. These business are a major part of the fabric of the American way of life. In aggregate, they drive growth, hire millions, and generate wealth for communities from coast to coast.
For these small businesses, access to capital can sometimes be a challenge. Without the massive balance sheets and scale of their larger, corporate competition, banks and equity investors view these small businesses as a high-risk, low-reward proposition. That makes it difficult for a hardware store to open a second location or a boutique clothing retailer to hire a new assistant manager.
But lending to these businesses can be a very profitable enterprise. For the savvy investor, this measure is an excellent proxy to find the banks that do it well, and those that don't. (Yes, I'm looking at you, Bank of America (NYSE:BAC).)
A win-win proposition
The Small Business Administration (SBA) offers a plethora of programs designed to encourage banks to make loans to small businesses on terms that are agreeable for the company.
For banks, the government offers a guarantee on a portion of the loan, meaning that if the small business cannot repay the money, then the government will share a portion of the loss. That's a 1:1 reduction in risk for the bank. Even further, there is a thriving secondary market for the guaranteed portion of these loans, allowing the banks to sell those loans at a premium to boost revenue. Lower risk, more revenue: it doesn't get much better than that.
For the small business, these loans can provide lower interest rates that are generally fixed, or more money-amortized over longer terms than would otherwise be available. In many cases, the small business wouldn't even be able to get a loan without these programs in the first place.
A win-win, that is, unless you're Bank of America
The SBA identifies the top banks lending through it's programs every year, giving both investors and businesses the opportunity to see which institutions are taking advantage of these resources.
Scrolling through this year' list of top SBA lenders, you'll see several familiar faces. There are Warren Buffett's favorite banks, Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB), at Nos. 1 and 3, respectively. The list really is a who's who of the nation's top small business lenders.
Where's Bank of America you ask? All the way down at No. 93. That's right, with over $2.1 trillion in total assets, Bank of America originated $26.1 million in SBA loans for the 12 months ended on Sept. 30, 2014. For context, Wells Fargo lent about 31 times that much over the same period.
To be fair, this does not mean Bank of America does not lend money to small businesses. The bank reports just over $32.8 billion in small business loans as of the close of the quarter ended on Sept. 30. That's a lot of loans, to be sure.
But that number isn't growing. In fact, it shrank by about $54 million from the quarter ending June 30. And $32.8 billion is but a sliver of the bank's $899 billion loan portfolio.
The Foolish takeaway
If you're an investor looking to buy shares of a bank that supports small businesses in the U.S., then Bank of America is probably not for you. While looking exclusively at SBA lending activity isn't a perfect method for discovering the top small business lenders, it does work as a general proxy for narrowing your choices.