Small businesses are considered the largest engine driving our economy, but these days they are LEAST able to secure the credit they need to expand. It's a conundrum for which finance experts say there are no easy fixes, as we heard earlier today on 90.3's the Sound of ideas. Ideastream's Bill Rice reports.
According to Wall Street Journal reporter Emily Maltby, small business loans issued by big banks declined nine percent in 2009 from the previous year among the nation's big banks - that's double the decline in overall lending brought on by the recession. Maltby poses two theories as to why that is, but says it's hard to pinpoint one or the other as the main reason.
Maltby: "Is it lack of demand, or is it that the banks are just being too strict. And it's very difficult to get to the bottom of that without data."
Ruth Clevelanger, Vice President and Community Affairs Officer at the Cleveland Federal Reserve, says both reasons are at play, but she leans more toward the tightening of credit policies among banks. She says there are many small businesses that are viable but need more working capital, and find banks less willing to consider their past working relationships.
Clevenger: "It appears, at least through some borrowers' perspective, that bankers are making wholesale decisions to lend or not lend to certain types of businesses, and that's been difficult."
Service businesses that lack tangible collateral, she says, are the least likely to get loans, yet service industries are the growing sectors in the U.S.
Maria Coyne, head of Business Banking at KeyBank, leans the other way. She says the recession has greatly reduced demand for both products and services - by as much as 30 percent since 2008, according to one Gallup poll - and that makes loan requests more inherently risky.
Coyne: "Nearly everyone has experienced people buying less from them, which has put tremendous pressure on cash flow. And cash flow is going to always be your number one determinant when you're making a credit decision. Do they have the ability to repay? You never want to make a loan to somebody who doesn't have the ability to repay."
Coyne, of course, is quick to deflect any inference that Key ignores its client relationships.
So what's a frustrated small business owner to do? The Wall Street Journal's Emily Maltby suggests looking beyond the boundaries of conventional lending. She says there are alternatives - micro-lenders and community development financial institutions, for instance, which can often assist with smaller-scale loans.