Is the Small Business Credit Crunch at a Turning Point?

Posted by: John Tozzi on August 17, 2009

Is the credit crunch for small businesses approaching an end? There’s a hopeful sign in the survey of senior loan officers out from the Fed today (PDF): One of the 55 banks survey reported that it had eased credit standards for lending to small firms (under $50 million in sales) over the past three months.

Of course, 19 reported tightening standards over the past three months, and most said they stayed the same. The chart below tracks the net percentage of banks tightening lending standards — as long as the dotted line is above zero, that means that on the whole more banks surveyed have tightened credit than eased it over the past quarter.

fed_chart_0817.bmp
Net Percentage of Domestic Banks Surveyed Tightening Standards for Commercial and Industrial Loans. Source: Federal Reserve

As you can see, the last time more banks in the survey eased small business credit than tightened it was at the end of 2006. Recent surveys have shown no banks at all easing credit and many more tightening it somewhat or considerably. So the presence of one bank of the 55 surveyed reducing credit standards over the last three months is a positive sign.

This survey asks about conditions over the last three months, so when a bank reports that it has tightened credit, that means raising standards from what they were in April 2009. By that point banks had already dramatically curtailed lending, pulling back throughout 2008. (Loan demand also continues to slacken, as fewer businesses look to expand, invest in equipment, etc., because of the weak economy.)

On the whole, the survey shows that we may be approaching a turning point where credit standards for small business borrowers level off and begin to ease. But for now, many more banks are still raising credit standards than easing them, albeit not as severely as over the last year.

Reader Comments

Richard Eitelberg

August 18, 2009 12:25 PM

Working "in the daily trenches" of finance and lending, to small, cash-strapped enterprises---I don't see any signs of this credit crisis leveling off. The past year, I have been overwhelmed by the number of decent business owners knocking on my door because their conventional bank, their asset-based lender, or their factor has cut them off or reduced their credit.

Sadly, a number of these business owners who contact me deserve some support from a lender somewhere, but it appears that they are not going to get it.

In my case, whenever a business owner asks me to assist with "purchase order financing" and "letters of credit", I must commit a significant amount of time and personnel resources to implement the application process, handle the documentation and all that goes with it. So I must be careful to select only those where I feel this work will lead to a successful transaction.

don rudnik

August 19, 2009 12:35 PM

One of 55 banks easing credit getting a headline and claiming crisis may be nearing an end may wnat ot buy a bridge I have for sale...
Just out statistics only 18% of 2009 Chapter filing are for Chapter 11 means more comapnies small and large will soon be wiriting down accounts receivable and thus make lending to small to mid sized businesses much harder

Numerous companies that would have been worthy of lending in 2008 no longer can find funding at nearly any price. These companies with under 100 employees do not get the headlines nor proper funding
for turnarounds in this post TARP universe. It is difficult to fund asset based loans with losses (which obviously eliminates cash flow lending)

The lending to small to mid sized businesses has gotten more difficult.
We as nation will start to pay the price in additional unemployment no matter what overly optimistic or synchopantic blogger writer thinks

Mark Phares

August 19, 2009 12:41 PM

We have been seeing an increased interest in Receivables Financing/Factoring from many firms who would not consider it a viable form of financing. In many cases we have been able to provide a "bridge" for their current cash flow needs until they can again get traditional bank financing.

King Trade Capital

August 19, 2009 1:12 PM

As the largest non-traditional/independent provider of financing for purchase orders and contracts we specialize in financing small to mid sized companies.

We are seeing many profitable and growing companies that need capital to fill orders and contracts because their bank or traditional asset based lenders cannot help either because of tighter lending standards or their own capital constraints.

We continue to see that lending standards will remain tight and capital will be limited to the better businesses, both small and large, for some time.

The good news is that well run businesses are gaining market share because weaker rivals are unable to compete. These companies are still able to get both traditional and non-traditional financing.

John Tozzi (BusinessWeek reporter)

August 19, 2009 1:16 PM

Hi Don,

thanks for your comment. I didn't intend the post to be "overly optimistic," and I think I stated pretty clearly that many more banks have tightened credit standards than eased them. But I read the Fed survey when it comes out every quarter, and the last time that even one bank reported loosening credit for small companies was July 2007. The fact that we're seeing that now I think is a positive sign.

It doesn't mean the credit crunch is over. But at least according to this survey it seems to be decelerating.

Scion Partners

August 20, 2009 1:15 PM

A sign of the times: DiversiCorp, well known in the 1980's and 1990's is rumored to be re-starting. They were the ONLY full service collateral control firm that dealt with transitional credits with the discipline of the old field warehouse industry. Lenders wanting out of inventory and vendors wanting security found help with DiversiCorp. Not sure but I think the original guy, Jim Mayer, well-known to many will spearhead this. If it happens, this is a very good development

Richard Montori

August 21, 2009 12:31 AM

Hear rumor about DiversiCorp also. They were a boutique but a real power house in the 80's-1995. If they are returning, it will make a difference to creditors both secured and unsecured. Wonder why they didn't come back sooner.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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