Small Business Credit in a Deep Recession

small business creditDenny Dennis, a senior fellow with the NFIB Research Foundation, let me know a while back that he was working on a new small business survey looking at the impact of the recession on credit. The NFIB released the report “Small Business Credit in a Deep Recession” today.

Here are a few highlights of the report:

  • Fifty-five percent of small employers attempted to borrow in 2009; 45 percent did not, although five percent of owners, so-called discouraged borrowers, did not try because they did not think they could obtain credit.
  • Forty percent of small business owners attempting to borrow in 2009 had all of their credit needs met; 10 percent had most of their needs met; 21 percent had some of their needs met; and, 23 percent had none of their credit needs met. The current level of borrowing success is significantly lower than in the mid-2000’s when up to 90 percent had their most recent credit request approved.
  • The financial institution extending a line of credit changed the terms/conditions of the line(s) during 2009 for 29 percent of small employers having at least one. About 10 percent of a business loan had the same experience as did 22 percent with a business credit card. The most frequent change was increased interest rates.
  • The best predictors of success in meeting credit needs were higher credit scores, customers of banks with less than $100 billion in assets, more properties collateralized for business purposes, and fewer second mortgages held.
  • Overwhelmingly, the most common planned purpose of credit rejected was to fill cash flow needs.
  • Broad and deep real estate ownership is a major reason why small businesses have not yet begun to recover, why larger businesses have been able to recover more quickly than small businesses, and why this recession is different, at least for small business owners, from recent ones.

Dennis puts the findings in a clear context. “The findings show that while obtaining credit has become more difficult, declining sales and/or depressed real estate values typically lie at the base of credit problems,” said Dennis. “That means current small business problems will not be solved by simply focusing on lending issues. Policymakers need to tackle weak demand and real estate.”

Tackling weak demand requires growth in the economy, not more liquidity in financial markets. Weak demand will also not be cured by Keynesian government spending initiatives.

This is an important study that I plan to go through carefully. I am sure it will inform future posts on small business credit.

[By Jeff Cornwall / February 25, 2010]

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