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Loans to Small Businesses Hit Four-Year Low in 2010

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Loans outstanding to small businesses hit a four year low of $652 billion in 2010, down 6.2% from the $695 billion outstanding at the end of 2009, according to a Small Business Administration study published in February, 2011 titled “Small Business Lending in the United States 2009-2010.”  For purposes of the study, the SBA defines small business loans as business loans under $1 million.

Of the $43 billion decline in loans outstanding to small businesses, so called “mega-lenders” (i.e., institutions with assets exceeding $50 billion) accounted for an aggregate reduction of $18 billion, or 6.7%, as their collective small business lending dropped from $270 to $252 billion.  By way of comparison, lenders with assets in the $100 to $500 million range saw their loans outstanding to small businesses drop by only 3.7% in 2010, from $130 to $125 billion.

A variety of reasons were given for the overall drop in small business lending, ranging from tightened credit standards, weakened lending institutions, and also weaker loan demand from healthy, established institutions concerned about the strength of the economic recovery.

The SBA report states that the recession has not pitted large borrowers vs. small borrowers, and that loans outstanding to large borrowers dropped by an even larger percentage, declining by 8.9% from the end of 2009 to the end of 2010.

 

Credit Crunch Hitting Small Businesses Hard

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Only half of small businesses that tried to borrow last year got all or most of what they needed, while in the mid-2000’s 80% got the loans they needed, according to the National Federation of Independent Businesses.   As reported  by Emily Maltby in the 6/21/2010 “Wall Street Journal,” possible explanations range from over-zealous bank examiners to small business owners turning more cautious in the face of a weak economy.  In mid-June, the House passed a $30 billion initiative for community banks to borrow from the government’s TARP fund at low rates, which may help stimulate small business lending, if and when the Senate passes the bill.

Even without passage of the initiative, “community banks are still lending,” notes Wharton lecturer and small business expert Robert Chalfin.  Community bank loans to small businesses are only down slightly in 2009 to about $680 billion outstanding, from about $700 billion in 2007, according to the Bureau of Labor Statistics and the American Bankers Association.

“The Firms that Should be Borrowing Aren’t There”

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A National Federation of Independent Business November ’09 survey indicated that while one-third of respondents worry about weak sales, only 4 percent of small-business owners viewed financing as their top concern, and only 10 percent reported problems getting a loan.   “It has been 35 years since businesses were this reluctant to boost inventories or consider capital expenditures,” stated William Dunkelberg, the NFIB’s chief economist; “the firms that should be borrowing aren’t there.”  In a similar vein, Camden Fine, the CEO of the Independent Community Bankers of America told the “Washington Post” in December 2009 that community banks have got “plenty of money to lend,” and the problem was a lack of demand from business.

According to the Federal Deposit Insurance Corp., the volume of small business loans on banks’ balance sheets at the end of the second quarter of 2009 was $761 billion, down 2 percent from a year earlier.  While weakened and cautious banks are getting blamed by many journalists and politicians for cutting off credit to small businesses and delaying the nation’s economic recovery, the NFIB survey results suggest that cautious small business owners are also a major factor.