Daily News: February 21, 2012

Study: More Small Businesses Shut Out of Credit Markets

A new study produced by the National Federation of Independent Small Business on Credit Access reveals that even while the slow economic recovery sent demand for credit on an upward trajectory in 2011, the real estate overhang continues to depress small business growth and curb capacity to borrow.

The report notes that in 2011, the number of small employers obtaining credit from financial institutions was approximately the same as the two years prior. However, demand for credit increased in 2011, meaning more small employers were shut out of the credit market than in prior years.

“The many fruitless attempts by policymakers to understand and improve the credit market for small businesses are due to the fact that they have thus far failed to adequately address the root causes of the economic crisis – lost confidence and uncertainty, and the housing crisis,” said William J. Dennis, NFIB senior research fellow and report author. “The real estate situation has been the elephant in the room since the onset of the Great Recession and remains a substantial variable in the current plight of small business. Washington has responded by doing just enough to be dangerous, but far too little to have any long-term positive impact. Until a workable solution is implemented, we can only expect glacial economic improvement from the small-business sector. It is not a good time to be optimistic, but small-business owners by nature seem to be.”

Other notable survey findings include:

  • The report found that while credit access can be a critical impediment to those who seek credit without success, it is dwarfed by two more significant small-business concerns: growing political and economic uncertainty and the protracted problem of poor sales.

  • A disconnect appears between lenders and small-business owners. Lenders think credit standards have not changed or have eased over the year. Small-business owners think that the credit market tightened in 2011, even in the latter part of the year when optimism was beginning to rise again. However, owners also appear more sanguine over their immediate economic prospects than do lenders.

  • There were more attempts to obtain credit in 2011. Fifty-seven percent of small employers sought credit from a financial institution in the last 12 months, a 9% increase over 2010. Demand for credit lines and credit cards each rose more than one-third over the previous year. The demand for line renewals and loans were flat. More attempts resulted in more rejections rather than more small-business owners receiving credit.

  • Almost half of small-business owners now consider one of the largest 18 banks in the country their primary financial institution. Twenty percent principally patronize a local or community bank, a sharp decline over the past three years.

  • The number of small-business owners possessing a business loan (not including lines or cards) fell noticeably between 2008 and 2011, from 44% to 29%. Possession of credit lines has also fallen 10 percentage points over the period, but not since 2009.

    To read the NFIB Study on Credit Access, click here.