Partial Credit Common Outcome for Small Businesses
The Federal Reserve Bank of New York released its latest Small Business Borrowers Poll, offering data and insight into the credit experiences of more than 500 regional small businesses.
Results suggest that discouraged firms and those that could secure only partial financing are challenges in the small business credit environment. While businesses continued to cite obstacles to obtaining credit, there are encouraging signs for future demand.
Overall, 63% of businesses that applied for financing received credit – but not always for the full amount requested. Only 13% were approved for the full amount, while 36% received partial financing.
The poll also suggests that future demand for loans is likely to come from re-applicants (firms that applied for credit between mid-2011 and mid-2012), most of which didn’t receive the full amount of credit they requested. Additional demand is also likely to come from new applicants (that did not apply between mid-2011 and mid-2012), many of them previously self-categorized as discouraged. These “short-term” discouraged firms may encounter difficulty obtaining credit since few cited strong bank relationships and many had weaker sales than successful applicants.
Small businesses indicated that microloans – under $100,000 – are highest in demand (58%) and are tougher to secure compared to larger loans. Risk factors that likely resulted in loan denials included less-established firms, weaker sales performance, and infrequent banking relationships. In general, firms were seeking these microloans to finance payroll, inventory and cash flow.
Almost half of the firms that did not apply for financing self-selected out of the applicant pool because they did not think they would be approved. Typically, these firms were small, had weaker sales, and primarily relied on savings and family for financing.
The New York Fed’s Small Business Borrowers Poll collects information from small businesses in the Federal Reserve’s Second District – New York, northern New Jersey and Fairfield County, CT – about their performance, credit experiences and employment needs.