Is Lending Still Tight for Small Business Owners?

Many small business owners are starting to feel better about their chances for success in their areas and industries given recent economic trends, but one area in which many may still be struggling is when it comes to their ability to obtain financing that may help them to grow their businesses.

Even as most other types of lending to consumers has been on the rise since the end of the recent recession, new data from the Federal Reserve Bank of Cleveland, as well as large amounts of more anecdotal evidence, suggests that the extension of loans to small businesses by bankers of all size is still below where it probably should be, according to a report from the Wall Street Journal. That, in turn, has likely served as an impediment to growth in this sector, and seems to also be restricting job creation and the more rapid bolstering of the national economy that would come with it.

Currently, the national economy is made up in large part by contributions from these smaller companies, the report said. In all, the gains of these companies account for roughly 40 percent of the gross domestic product, and as much as half of all non-government payrolls.

Small businesses have long favored financing of less than $1 million, and prior to the recession, the number of these loans extended nationwide stood at about 344,000 more than it did at the end of last year, the report said. This came despite the fact that the number of small businesses in operation nationwide had risen by more than 100,000, and that shows just how desperate the situation has already grown.

Creating a vicious cycle?
Without the added funds that can come from small business loans – and which owners typically use to increase hiring, expand facilities, and buy new equipment that can help them serve a potentially larger number of customers or clients – many companies are seeing potential for growth stagnate, the report said. That, in turn, could keep them from looking as creditworthy as they otherwise might be, leading to a situation in which they can't grow because they cannot obtain the funding necessary to do so, and they can't obtain that funding because they haven't shown enough growth.

Moreover, the authors of the Cleveland Fed's study also believe that this is an issue that likely won't go away.

"Banks have been exiting the small business loan market for over a decade," they wrote in the study, according to the newspaper. "This confluence of events makes it unlikely that small business credit will spontaneously increase anytime in the near future."

The study's conclusion stated that the lack of availability for small business loans nationwide may become so problematic for owners in the near future that it may become incumbent upon regulators and lawmakers to start enacting interventions that make sure these companies have some access to credit, though they may have to proceed cautiously when doing so, the report said. If the wrong policies for this kind of step are pursued, there may be unintended negative consequences for the banking industry and more.

Independent owners who are having trouble obtaining financing from banks may need to look internally to free up some money they might need for expansion efforts. This might include taking a hard look at small business insurance expenses, including for workers' compensation and general liability insurance coverage. These policies can grow quite costly for many companies and therefore finding the best possible plans that work for each specific company may be a very cost-effective step to take.