Small Business Credit Crunch 2010

The conflicting stories about the availability of credit for small businesses continue.  A new survey released by the Federal Reserve asking small business owners about their access to credit, showed a continuing mismatch between businesses that want to expand and banks that want to assist them in funding growth.  The survey was done in New York, but the sample was designed to match the structure of the US small business market, including that 70% of the respondents had 5 or fewer employees. 

It takes no time at all to find data points indicating the decline in lending is demand driven (that is small businesses aren’t looking for loans these days), but the Fed survey team says that’s not the case. 

The survey found 59% of respondents had applied for credit during the first half of 2010.  That compares to an average of 40% pre-recession.  More than 75% of the applicants received only “some" or “none” of the credit they wanted.  Some of the problem is arguably related to the credit worthiness of the borrowers.   66% of respondents reported they had sales / revenue declines over the last two years.  It is worth noting that the only area where financing was granted more than half of the time was equipment finance.  Clearly "collateral rules" these days. 

In general, there were three factors that were statistically significant in terms of the population ultimately ruled as credit worthy by receipt of a loan.

Firms with a track record did better, and being part of the one-third of applicants who grew revenue through this recessionary period was a big help.  Finally owners who salt away some savings in retained earnings make a better impression on their bankers.  Perhaps most interesting, was the factor that wasn’t a predictor of receiving credit – having had a loan.  70% of the applicants in the sample had been granted credit from the same financial institution  2008.  Of that group only half were approved—the same percentage approval rate as in the overall sample.  One other noteworthy twist is that although construction and retail firms were disproportionately represented among the industries looking for credit, they were granted loans at the same rate as firms in other sectors. 

The authors of the Fed study hypothesize that more banks consistently providing a “second-look program” could yield significant gains in access to credit.  They acknowledge though that this is only in theory.  It may be worth investigating.  The authors of the study also point out that these small firms typically account for about 60% of gross job creation.  The link between capital access and adding jobs is well proven.