Traditional Small Business Lending Isn’t Keeping Up

  • January 8, 2015

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Despite recent strength in the U.S. economy, traditional small-business lending is still in the doldrums. “U.S. small-business lending never quite regained the ground lost during the Great Recession,” writes Pedro Nicolaci da Costa for the Wall Street Journal, “ceding significant market share to larger firms that have benefited from a gradual but lengthy economic recovery, research from the Federal Reserve Bank of Cleveland finds.”

Despite the fact that earlier this month the Journal reported small-business optimism was surging, banks just aren’t lending in amounts under $1 million like they were pre-recession, which means they aren’t lending to the smallest small businesses. Even though small businesses collectively create two out of every three new jobs and hire roughly half of the U.S. workforce, it would seem the bank around the corner hasn’t stepped up to their traditional role as financial partner with the businesses within their communities.

“While large business loans have soared to record levels, small business lending is losing ground,” writes Ann Marie Wiersch, a senior policy analyst in the Community Development Department at the Federal Reserve Bank of Cleveland.

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The Federal Reserve Bank is using bank loans under $1 million as a proxy for small business lending, and suggests that during the last 10 years the data shows that the volume of small loans, those under $1 million, dropped significantly between 2008 and 2012. “Small business loans now stand 17 percent below the peak reached prior to the recession,” writes Wiersch. “While small commercial and industrial loans grew 3.4 percent over the past year, this modest improvement does not provide strong assurances about the health of lending in this space. In contrast, lending to larger businesses (loans greater than $1 million) bounced back quickly and loans outstanding are now more than 24 percent higher than pre-recession levels.”

Some of this might be attributed to the way small business owners are reacting to the banking industry’s reluctance to lend during the recession. While small business optimism is showing improvement, the financial situation for many small businesses is getting better, and it looks like Congress might be good to small business owners in 2015, there is still a decline in small business loan originations. As traditional sources of credit dried up during the recession, demand weakened and even though some banks are starting to relax credit restraints, demand for traditional small business financing remains soft.

“New and small firms serve an important function in our economy,” writes Wiersch. “Small businesses account for nearly half of private sector output and employment in the U.S. In addition, small firms—led by new small firms—have posted the highest net job creation rates going back to the 1970s. Coming out of the most recent recession, however, job creation by small businesses has lagged, and the new business formation rate continues to fall. While it is not clear that these trends are driven by weaker borrowing or limited access to loans, it is evident that businesses need adequate credit to succeed and grow. As such, policy makers should not lose sight of the trends related to small business credit, even with the recent positive reports showing improvements.”

It’s no secret access to capital is one of the challenges every small business owner must face. The smallest small businesses in the U.S. can’t be ignored if we want continued job growth and a strong economy.

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