Why Credit Matters to Employment and Sales

Posted by: John Tozzi on February 16, 2010

Reuters’ Felix Salmon looks at the relationship between bank credit and small business hiring. Even though big companies are sitting on cash, they won’t drive the jobs recovery anyway, he writes:

…gains in employment have rarely if ever been driven by hiring in the S&P 500. If you want to see bank loans turned into jobs, the key sector to look at is not big companies but small ones. And when it comes to them, I think that the decline in bank lending is much more of a supply issue than it is with the S&P 500. If banks were more willing to lend to small businesses, I think that we would certainly see more loans taken out — and higher employment as a result.

Fed Chairman Ben Bernanke said the same thing in November. This analysis is important to keep in mind when considering assertions that small businesses do not face real credit constraints — like this one commonly made by the NFIB:

…only five percent of small business owners cite “financing” as their top business problem but 31 percent cite “poor sales.” We are building less than half of the number of housing units normally constructed, putting a huge dent in mortgage and construction loan demand. We are also buying two-thirds the number of cars normally purchased, so auto credit demand is way off too. Plans for capital expenditures and inventory investment among small firms are at 35 year lows. Even large bank CEOs now admit loan demand is weak! [Page 6 of Small Business Economic Trends, February 2010.]

No doubt demand for bank credit has decreased, but so has the supply. When companies that want to borrow can’t, that stymies job growth. And high unemployment contributes to the weak consumer demand that the NFIB’s respondents identify as the core problem. These things are all intertwined, as Bernanke pointed out:

Banks’ reluctance to lend will limit the ability of some businesses to expand and hire. … Jobs are likely to remain scarce for some time, keeping households cautious about spending.

Tightened bank credit has real consequences for the jobs recovery. Here’s what one commenter, Jeff Goldberg, said last fall:

My experience is we had credit available in the early 1990’s. This time it has all but dried up. With no credit it is difficult to wiggle. We therefore have laid off 2 people and are hoping for some type of holiday season to pull us through.

It’s hard to see how jobs or spending will recover without some loosening of bank credit to the companies that will hire the employees who will spend.

Reader Comments

William Dunkelberg

February 17, 2010 03:06 PM

bad loans can create jobs, just check out homebuilding 2003-2007. As chairman of a bank (also NFIB chief economist) i can tell you we have money to lend and don't turn down good loans. We don't have many good applicants however. We built too many houses, retail outlets, strip malls, restaurants etc 2003-07, so there are firms that want credit, but not too many whose growth is constrained by lack of credit that have a good P&L and business plan. This is a story i get around the country speaking to community banking groups. big banks that lost a lot of money (that we little banks are paying for) did cut back on lending. there are 6,000 commercial banks that can be shopped. Meanwhile, we wont hire workers until sales are stong enough to that they can pay for themselves. Give a small business owner a free loan (that must be repaid), today they'll put it in the bank.

Steve King

February 17, 2010 04:45 PM

We're hearing similar things as Mr Dunkelberg - community banks have money to lend, but few credit worthy applicants.

A lot of small businesses are telling us they are hunkering down until the economy is stronger. Product/service demand is simply too uncertain for them to take on debt.

This is not to say there aren't good businesses who cannot get credit. But we think lack of demand and concerns/ fears about the economy are bigger issues.

This is a chicken/egg kind of problem, but we think small businesses are unlikely to take on debt until they are more confident an economic recovery is in place.

High Risk Lenders

February 18, 2010 01:29 AM

Thanks! very helpful post!

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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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