The Wall Street Journal
By: John Bussey
August 5, 2011
Small-business lending has been in trouble, but is there an explanation beyond the widespread perception that banks are denying credit, and starving small entrepreneurs?
Clearly, the financial crisis and recession whacked banks and curtailed lending to small companies. Lending still hasn't returned to prerecession levels.
But here's an alternative view of the principal cause: A range of observers report that, in many cases, small businesses don't want loans. Their sales are so weak they can't justify taking on debt to expand operations.
"It's the sheer lack of expectation that they're going to grow their company," says Bernie Kuechler, of Barlow Research Associates, which does market research for the banking industry. "A major driver is that companies are not applying for credit." Barlow defines small businesses as companies with annual sales between $100,000 and $10 million.
Researchers at the Federal Reserve Bank of New York concluded that "although a tightened credit supply constrained some small firms, weak consumer demand for the firms' products and services was a more pressing factor" for small businesses during the recession.
Those struggles continue and will only be exacerbated by Thursday's stock-market selloff. The more the economy teeters, the weaker consumption gets.
"You hear banks are the problem, but our members don't say lending is a problem," says Cynthia Magnuson of the National Federation of Independent Business, which represents 350,000 small businesses. "This is a demand problem, not a lending problem, adds William Dennis Jr., who runs the NFIB's research.
In a survey conducted by Gallup, the NFIB asked the nation's small businesses, defined as 250 employees or less, to name the "most important finance problem facing your business today." About 29% said bad sales, 26% unpredictable business conditions, 14% said they didn't have finance problems, and just 12% cited an inability to obtain credit.
Small businesses are critical to the U.S. economy because they employ about half of the people working in the private sector and generate an outsize share of new jobs.
Many banks tightened credit during the recession, and many small businesses couldn't--and still can't--qualify for loans or gave up trying because their books turned sour. The drop in the value of real estate, often used by small businesses as collateral for loans, has also hammered them. Start-ups have been particularly hard hit.
Still, the abiding problem appears to be a lack of customers. "Why borrow for a truck when you don't need a truck, or open a new line when there isn't demand for your product?" says Mr. Dennis.
The U.S. Chamber of Commerce polled small-business executives on the "main challenge facing small business owners," and just 3% of the respondents said "lack of credit."
The National Small Business Association, which has 150,000 members, released a survey this week that said 36% of small businesses "report an inability to garner adequate financing." Asked how that compares with past years, a spokeswoman for the group said the figure has averaged 32% over the past 17 years. "It's not a huge change, but it's not insignificant," she said.
For the added 4% who had trouble getting a loan, it is indeed bad news. But it doesn't suggest a new credit crunch.
Banks need to lend to stay in business, and as their customers retreated, some bankers have pursued them.
Huntington National Bank of Columbus, Ohio, says it has added more than 150 small-business bankers in the past 18 months. "Demand from existing businesses is not up," says Steven Rhodes, Huntington's director of business banking. But "we're beating the bushes" for new business, and with success, he says. Overall lending is higher.
That said, Scott Shane, a professor of economics at Case Western Reserve and a visiting scholar at the Cleveland Fed, says the role of tight credit shouldn't be underestimated. Demand for loans may be down, but supply is too. Among other things, banks are getting more scrutiny from regulators, and that can result in a tighter grip on loans.
Tighter is relative. If the comparison point is the prerecession years, those were loose days indeed. The NFIB says the vast majority of small-business owners it surveyed back then reported their last loan request was approved.
That's a benchmark that's unlikely to be replicated anytime soon.
Write to John Bussey at email@example.com
Corrections & Amplifications
An earlier version of this article misspelled Gallup as Gallop.