Lending Ease Fuels Biz Growth

More small businesses say they’re finding it easier to secure loans, a shift that could serve as the catalyst to jump-start the slow recovery and weak job market.

Small companies with fewer than 100 workers make up half the U.S. labor force and typically account for two-thirds of jobs created in a recovery. So far, though, small business has benefited far less than large companies since the Great Recession officially ended in June 2009.

Many small businesses still complain credit is tight. But in a recent survey by the National Federation of Independent Business (NFIB), the portion saying loans were harder to get than three months earlier was the lowest since September 2008.

Additionally, senior loan officers surveyed by the U.S. Federal Reserve say their standards for smaller business loans eased for the second-straight quarter in three months ending Sept. 30.

“This looks to us like the start of a serious improvement,” says Chief Economist Ian Shepherdson of High Frequency Economics. Examples of previously denied small businesses finally securing loans after two years are surfacing throughout the country.

Recovery Signs Abound

Employers added 151,000 jobs in October, the most in five months, although the U.S. unemployment rate remains unchanged at 9.6 percent. Retail sales of late have been beating estimates.

The U.S. Department of Commerce raised its estimate of third-quarter economic growth to an annual rate of 2.5 percent. It’s still lackluster, but at least it’s moving in the right direction.

Further, financial institutions are on stronger financial footing, with more capital and fewer bad loans to write off.

The amount of loans that banks charged off in the third quarter fell versus a year ago for the second straight quarter after rising steadily since late 2006, according to the Federal Deposit Insurance Corp.

“Banks have worked through a lot of their problems,” says Paul Merski, chief economist for the Independent Community Bankers of America (ICBA). “The industry is in a better position to increase lending.”

Interest rates are so low that banks can scarcely make a profit by investing depositors’ money in T-bills. “Eventually for banks to become profitable, you have to start taking some risk,” Merski says.

Commercial and industrial loans by small banks, which largely serve small firms, grew at a 4.1 percent annual rate in October, the most since 2008, according to a UBS analysis of federal data.

Credit Conditions Tight

Given the improvements, most lenders are still tight-fisted. Credit conditions aren’t nearly as favorable as they were before the 2008 financial crisis.

Sal Marranca, president of Cattaraugus County Bank in Little Valley, N.Y., and ICBA’s incoming chairman, says regulators continue to pressure banks to impose tougher standards following the Great Recession that began in December 2007.

Also, many laid-off workers have tried to secure loans, but 90 percent of the workers don’t have any collateral to back their own business.

Meanwhile, most small businesses aren’t trying to borrow, since they haven’t seen a robust pickup in sales, says NFIB Chief Economist William Dunkleberg.

Many analysts feel that even a gradual improvement in banks’ willingness to lend could fuel small business expansion as demand continues to grow.

What Needs Doing

WMB believes banks need to continue to ease lending practices in order to create more jobs throughout America.

Large and medium-sized companies, now turning large profits, remain on the sidelines. They are reluctant to reinvest in their own companies since their confidence has been shattered by the global downturn and technological changes.

WMB believes it’s now up to the small businesses throughout our country to help turn our economy around and create new jobs. Further, the U.S. government needs to offer new incentives and help provide tax relief for small business willing to take risk and hire new employees.

This post is by TechMan, WMB co-author who blogs about trends, issues and ideas affecting business, industry, technology and consumers. If you like this post, please share it!