Small business borrowing isn’t what it used to be.
In an earlier column (
http://english.alrroya.com/node/24659), I pointed out lending to US small business is down from its level before the financial crisis. As I explained in that column, tighter bank lending standards have contributed to the decline in small business borrowing.
But tougher bank lending standards are only a small part of what’s been going on. Slack demand, a focus of banks on strong borrowers, and tighter standards for trade credit, also have played a role.
Many companies aren’t seeking credit because demand for their products and services is off. The January 2010 American Express OPEN Small Business Monitor, a representative sample of 650 small business owners with fewer than 100 employees, found that 59 per cent of small businesses did not try to obtain a credit line, bank loan or credit card over the second half of 2009.
While some of these business owners didn’t look for credit because they didn’t think they would get it, a bigger chunk chose not to search because weak demand led them to put off expansion plans.
According to the American Express OPEN survey, 30 per cent of the businesses that didn’t look for debt in the past year chose not to because “there is not enough demand for our products or services to warrant taking on new debt.”
While total small business borrowing is down, this decline comes primarily from the inability of business owners with poor credit to access debt. Good credit risks have been able to get the loans that they need.
A survey of a representative sample of small business owners conducted by the Gallup Organization on behalf of the National Federation of Independent Businesses (NFIB) showed that last year less than 15 per cent of business owners were unable to obtain equipment financing from a seller, a new or extended line of credit, a loan from a financial institution or a business credit card.
Most borrowers also aren’t facing a change in the conditions of their loans. The NFIB/Gallup survey shows that only 10 per cent of small business owners with a loan experienced a change in loan terms or conditions in the last year.
However, some businesses can’t get credit. The NFIB data show that the share of businesses with a loan fell from 44 to 36 per cent, and the share with a line of credit dropped from 57 to 46 per cent, even though the total number of small business loans has remained constant.
The NFIB/Gallup data shows that the businesses with worse credit scores were less likely to receive all types of loans in the past year.
Moreover, when the businesses that failed to get credit were asked what they would have used the money for, 71 per cent of said it would have gone to pay for day-to-day operations, double the number that would have used the money for investment in plant and equipment or other types of expansion.
The big banks aren’t the only ones that have tightened credit standards. The NFIB/Gallup survey revealed that 29.2 per cent of small business owners tightened credit on their customers last year, and only 4.6 per cent loosened it.
Similarly, 26.8 per cent of small business owners reported that their suppliers tightened credit on them, while only 1.4 per cent reported that their suppliers loosened it.
In short, it’s true that banks have tightened their credit standards, making it difficult for small businesses to get loans. However, banks’ increase in credit standards explains only some of the reason that small business borrowing has dropped since the financial crisis began.
Slack demand has reduced the number of companies looking to borrow. The weakest companies seeking credit are finding it hard to tap, particularly those seeking money to make up for lost cash flow. And many companies – small businesses included – have tightened up standards for extending credit to their customers.
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