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.