By Hao Li: Subscribe to Hao's RSS feed
October 18, 2010 6:51 PM EDT
Outstanding loans to U.S. small businesses shank from about $710 billion in second quarter 2008 to about $670 billion in first quarter 2010. This was mostly due to more restricted credit availability rather than weak demand, according to a poll conducted by the New York Federal Reserve.
In the first half of 2010, 59 percent of the polled small business owners had applied for a loan, compared with about 55 percent in 2009 and 40 percent in the pre-recession period, suggesting that demand for credit is strong, not weak, in 2010.
Banks, on the other hand, are more reluctant to extend loans. Of the small businesses polled by the NY Fed, three-fourths did not get all the credit products they wanted. One-third of them didn't get anything at all. A business line of credit, the most requested credit product, had a denial rate of 63 percent.
The National Small Business Association, in a separate survey for 2010, similarly found that 41 percent of its polled applicants did not obtain adequate financing, up from 22 percent two years ago.
Follow us
Interestingly, from the NY Fed survey, 70 percent of 2010 credit applicants also applied in 2008; however, this prior relationship did not really help them receive loans, since only half of them were approved. This suggested that banks are rejecting the same applicants they received 2 years ago -- although the credit quality of these firms may have declined because of the recession.
The survey also discovered the three keys to obtaining credit in 2010; successful firms generally have been around for at least five years, can generate positive sales/revenue growth in recessionary times, and are able to finance themselves from retained earnings in 2008.
Credit conditions of small businesses is an important matter for the jobs market and overall economy; small businesses employ half of all Americans, account for 60 percent of gross job creation, and historically jump-start job creation at the beginning of economic recoveries, said the NY Fed.
According to the Federal Reserve Board, small businesses face tougher credit conditions because banks adopted higher lending standards, face staffing and capital shortages, and reportedly face increasing scrutiny from bank examiners.
Email Hao Li in New York at hao.li@IBTimes.com.
To report problems or to leave feedback about this article, e-mail:
To contact the editor, e-mail:
We value your privacy. Your email address will not be shared.
