Why JP Morgan Chase Earns an “F” for Small-Business Lending

Looking for a lender who cares about small business? A new service shows which ones are at the head of the class.
Freelance Writer, Self-employed
July 10, 2012

Which bank is most likely to make a small-business loan? This question has a new answer thanks to Banking Grades, a free service that gives lenders a letter grade based on how important small-business lending is to them.

Banking Grades was created by Ami Kassar, founder and CEO of MultiFunding, a loan broker in Broad Axe, Pa. Kassar used data not previously applied to the problem of identifying small business-friendly lenders. He says the result is better than other approaches.

Generally, speaking Banking Grades gives higher marks to small community banks than to the big banks. For instance, in Austin, Texas, only three banks get the highest "A" grade: Gulf Coast Bank and Trust, which has $740 million in deposits, and two branches of Horizon Bank, with a combined $221 million in deposits. By contrast, a local branch of JP Morgan Chase, with $835 billion in deposits—roughly 1,000 times larger than Gulf Coast Bank—receives the lowest grade "F."

The Grading Scale

Kassar generates grades by comparing the dollar amount of a bank’s deposits to the dollar amount of its loans for amounts of less than $1 million (an amount he declares as a "small-business loan.")

  • "A" = Lends out 25 percent or more of deposits as small-business loans

  • "B" = Lends out 10 to 25 percent of deposits as small-business loans

  • "C" = Lends out 6 percent to 10 percent of deposits as small-business loans

  • "D" = Lends out 3 percent to 6 percent of deposits as small-business loans

  • "F" = Lends less than 3 percent of deposits as small-business loans

The average bank of the 6,716 banks Kassar graded lends 7.6 percent of deposits as small-business loans, he says.

Gulf Coast, for instance, gets an "A" because it has loaned $235 million, or nearly 32 percent of its total deposits, in loans of less than $1 million each. JP Morgan Chase, on the other hand, has about $19.6 billion in similar-sized loans, for a ratio to deposits of just over 2 percent and an "F" grade.

Grade Inflation

Kassar says he decided to create Banking Grades as an alternative to other ratings of small business lenders, including those from the Small Business Administration and the banks themselves. These other sources tend to produce very different findings than his approach.

For instance, the Small Business Administration named Key Bank of Cleveland last year’s top lender in its core 7 (a) loan guarantee program, pointing to its “dramatic growth of almost 31 percent in the number of SBA-backed loans and more than 90 percent increase in SBA gross dollars approved in FY 2011.”  Banking Grades, meanwhile, gives Key Bank a "D" because its small business loans of $3.3 billion were just 5.25 percent of its total deposits of $63.5 billion.

Another source for small business lending info is the banks themselves. JP Morgan Chase recently proclaimed itself the “nation's #1 SBA lender,” basing its claim in part on the fact that it approved 2,198 loans for a total of $390 million through March 31, 2012. Chase says in fiscal 2011, it loaned $1.1 billion in 5,509 SBA loans and lines of credit, including 3,665 for less than $250,000.

Not-So-Small Businesses

The reason Banking Grades scores differ so much from the SBA’s and the banks’ is largely because of what Kassar considers a small-business loan. A $1 million loan, he says, is likely to be going to support what most people would consider a small business. Other definitions of small business, however, are more expansive on the upper end. The SBA, for instance, may consider a manufacturer with up to 1,500 employees a small firm, and individual banks are free to call a loan of $10 million or even $20 million or small-business loan.

The large banks that get mostly bad grades from Kassar defend themselves by pointing to their admittedly large numbers and dollar volumes of SBA-backed loans. The fact that the percentage of deposits represented by these loans is small is more a factor of the size of their deposits than their emphasis on small business lending, according to them.

Go Where You're Wanted

Kassar’s advice about what to do with this information is succinct: “Go to your county or zip code and start at the top of the list and work your way down,” he says. His argument is that banks with more focus on small business lending are more likely to help. “That doesn’t mean you can’t get a loan at a bank with a C, D, or F,” he says. “But that’s not their bread and butter. A bank with an A grade is deeply involved in small business lending and that’s why we think they’re the better places.”

In future, Kassar aims to update the Banking Grades database with new data as it becomes available from the Federal Deposit Insurance Corporation. He’s also begun an awards program, handing out stickers to banks that want to proclaim their ranking. “We hope the symbol will come to symbolize good small business-friendly banks,” he says. “I can’t force F banks to put an "F" on their window. But I can encourage A banks to put an "A" on their window.”

Have you had luck borrowing from a major bank? 

Photo credit: OPENForum