Smallest Businesses Having Most Trouble Getting Loans

Businesses of nearly all sizes have likely had more difficulty securing most types of financing in the past few years than they did prior to the recession, and that has affected many such companies when they’ve been looking to expand or better secure their financial footing. Unfortunately, new data further suggests that it has often been the smallest companies, which may need the most help, that are having the most trouble in this area.

Companies with fewer than 20 employees, startups, and enterprises owned by either minorities or women often have the most difficulty in obtaining small business loans when they want them, according to a new survey from the Institute for Local Self-Reliance. Today, about 42 percent of local businesses say they have not been able to obtain financing in the last two years when they applied. Data from the Federal Deposit Insurance Corp. backs that up: banks and credit unions only had about $150 billion in outstanding balances extended in the form of “micro” business loans of $100,000 or less, which are typically sought by those smallest companies in particular. That’s compared with roughly $480 billion in loans of between $100,000 and $1 million.

How difficult is it?
Likewise, the most recent data from the Federal Reserve compiled by the ILSR shows that micro business loans were down 33 percent between 2000 and 2012, compared with a 14 percent decline for normal small business loans, the report said. As one might imagine, this tightening credit situation was exacerbated during and after the financial downturn that began in 2007, but it did not, in any significant way, affect loans being made to large businesses, which were actually up 36 percent over the 12-year period being examined.

“Following the financial collapse, demand for small business loans, not surprisingly, declined,” the report’s authors wrote. “At the same time, lending standards tightened dramatically, so those businesses that did see an opportunity to grow during the recession had a harder time gaining approval for a loan.”

Owners who want to improve their companies’ chances of succeeding financially might want to consider the ways in which they can do more to reduce their costs, such as by finding more affordable small business insurance. Cutting expenses for liability insurance, for example, may allow enterprises to free up thousands of dollars annually, which can then be put toward improving other parts of the business.