New York Fed Survey Shows Credit Gap for Small Business

Posted by: John Tozzi on October 21, 2010

Small businesses in the New York area show “unabated demand” for loans and “widespread reports of unmet credit needs,” according to a new survey by the Federal Reserve Bank of New York. Of the 59 percent of businesses responding to the poll that applied for credit in the first half of 2010, only half got any loan approval at all, and three quarters said their full borrowing needs were not met. (The PDF of the report is available here.)

The online poll, which surveyed 426 small businesses in New York and neighboring states in June and July, adds some useful data points to what has become a central question of the recovery: Why has borrowing declined among small businesses? The volume of outstanding loans to small businesses has dropped by $45 billion, or about 6 percent, since 2008, according to data from bank regulatory filings.

The New York Fed survey suggests that the contraction isn’t driven by lack of demand from borrowers. Deteriorating business conditions for applicants may play a role. Two-thirds of business polled reported that their sales declined since 2008. Companies that successfully got credit tended to be more established, showed sales growth through the recession, or were able to use their profits to fund their businesses in 2008.

While the health of businesses influenced whether or not they succeeded in getting loans, it didn’t influence whether or not they applied for credit. “High sales performers and businesses that were having either stagnant sales or declining sales applied at roughly similar rates,” says Claire Kramer, a senior analyst at the New York Fed’s Community Affairs group, who co-authored the report. That finding, the report says, “casts doubt on suggestions that smaller, younger, financially weakened, or underperforming firms are drivers of credit demand.”

The forms of credit with the highest approval rates were financing for vehicles and equipment (63 percent of applicants were approved) and personal credit cards (46 percent approved). The forms that were approved least often were applications for business loans (20 percent approved) and new business credit lines (27 percent approved). Companies that had obtained credit successfully in 2008 were not any more likely to be approved, the survey found.

The survey concludes that the “second look” reviews that some banks have started, along with technical assistance for businesses, could help more applicants become viable borrowers.

The New York Fed’s findings about credit demand contradict other survey evidence, including from the National Federation of Independent Business, that suggests lending is down because businesses don’t want to borrow. The NFIB’s latest monthly member survey said that 91 percent of respondents reported that their credit needs were met, including 53 percent that were not interested in borrowing.

The survey, along with an earlier one from the Atlanta Fed, adds to the limited set of data about small business lending. The New York Fed plans to release a second report based on the same data in early 2011, and similar surveys are planned by other Federal Reserve Banks, including Boston and Cleveland, says Jeffrey Smith, a spokesman for the New York Fed.

Reader Comments

Philip Lewis

January 1, 2011 7:43 AM

It's amazing how little is known about why small businesses borrow money, what they do with it and how they intend to repay lenders. Many small businesses are managed by people who are relatively unsophisticated and sometimes incapable of convincing a lender of their ability to repay. A loan to a small business should not be akin to throwing money away. A smart borrower with a viable business can borrow money. Many small businesses are formed and managed by clueless people who should probably seek employment from a third party.

David Barnes

January 21, 2011 4:35 PM

What is really amazing is how ignorant most loan officers are at banks. You may look at the books of a small business and it is just getting by. So the Loan Officer will say to the owner that we can not loan you the money because you do not have the means to repay the loan. Yet it is the money from the loan that enables the small business to increase sales to make the money to make the loan payment. What kills small businesses is the fact that while you may be able to get a loan for equipment you can not borrow money for operating expenses.
It is a good thing there are clueless people who do sometimes succeed or else most people would not have a job or anything to eat. My business was doing fine till the bank pulled our line of credit. With out it we are unable to take advantage of opportunities as we have in the past. Now our sales are flat and with just a little back luck there will be one less business and 5 more people unemployed.
So when Wall Street destroyes Main Street I am willing to bet it will be the unsophisticated who rise out of the ashes and rebuild the country.

Post a comment

 

About

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.

BW Mall - Sponsored Links

Buy a link now!