Lack of Credit Availability Still Plaguing Many Small Businesses

The recent recession led many of the nation’s lenders, both large and small, to scale back the rates at which they issued credit to consumers and businesses alike. And while they have once again slackened qualifications for many consumer finance products, those for businesses remain stubbornly stuck at the levels of a few years ago.

The latest data from the Federal Deposit Insurance Corp. shows that small business loans issued nationwide last year came in at only a little more than $587.8 billion in total, and that number was actually down slightly from 2011, according to a report from CNBC. In fact, the dollar value of loans issued to small businesses has been steadily declining since 2008. On the other hand, lending for larger businesses has soared, the report said. After falling to a recent low of about $1.6 trillion annually in 2010 (still higher than the 2007 number of $1.5 trillion), this type of lending effort was stepped up considerably on the part of banks in each of the following two years, rising to some $1.9 trillion annually last year.

The decline in small business lending – loans totaling $1 million or less – is now down roughly 19.1 percent since the start of the recession, the report said. Meanwhile, that increase in larger lending is up 12 percent. However, this is not a new problem for small businesses, and in fact has been observed many times over the years.

“What we are witnessing is the classic dilemma,” according to Andrew Sherman, a partner at Jones Day in Washington who advises small and midsize companies on corporate finance. “When the banking industry gets soft and becomes risk adverse, small business lending is the first to go and the last to recover.”

The problem isn’t getting much better
In addition to the small business lending problems observed over the course of last year, larger banks are still being fairly stingy when it comes to granting credit to these companies, the report said. Data from the lending site Biz2Credit shows that just 17 percent of small business loan applications submitted to banks with $10 billion or more in assets in July actually received approval, down more than half from the 36 percent rate that was common prior to the onset of the recession.

It seems that these increasingly risk-averse banks are now more interested in a company’s profitability when nationwide economic conditions were still not very good, looking into the last three years’ worth of financial records to ensure that the companies were making money in the immediate wake of the recession, the report said. In addition, they are also asking for more collateral from businesses themselves, as 80 percent of all small business loans worth between $100,000 and $1 million issued this year were backed by some sort of collateral, up from 76 percent in 2007.

Consequently, many small business owners seem, based on more anecdotal evidence, to be avoiding banks entirely when seeking financing, and either obtaining it through microlenders that don’t require as stringent financial checks, or else simply going without it, the report said. This often happens despite that fact that many small businesses rely on the added liquidity such financing can provide to function on a daily basis.

Owners who have had difficulties in obtaining financing in the past several months may instead want to free up money by finding more affordable small business insurance. Cutting costs for liability insurance and other types of policies may help add a little bit of wiggle room for many companies without going through a trying process first.