Small business lending is a big issue. Many have noted the decline in lending during the recession and a number of policy efforts to stimulate lending to small businesses have been suggested or implemented.
But it is unclear if a lack of credit is the primary reason for the decline in lending. Some, like us at Smallbizlabs, believe that while a lack of credit availability is a problem, a lack of credit demand is the bigger problem.
Simply put, we think most small business owners are not interested in adding debt (or expanding) until it is clear their business prospects are better.
The Atlanta Federal Reserve Bank looked at this issue and recently released a paper showing that lack of demand is the primary cause for the lending slow down. Key quote:
"Perhaps not surprisingly, outside of the troubled construction and real estate industries, close to half the firms polled (46 percent) do not believe there are any obstacles while only 9 percent report unwillingness on the part of banks."
Our research last year on small business credit mirrors these results. We've also continued to hear from small businesses and banks that credit is available, if the borrowing firm is creditworthy.
Having said that, because of the recession a lot of formally creditworthy small businesses aren't anymore. Declines in sales and profitability are major problems.
Credit standards are also tougher than during the credit bubble. And they will remain so until we collectively forget that easy credit results in bubbles that end badly (historically, around 7-10 years).
From our perspective, creating programs that attempt to stimulate loan demand will likely have limited impact at this point in time. However, as the economy continues to recover we expect small business demand for credit to also pick up.
We believe the small business economy is lagging the overall economy in recovering, and has just started to turn. We expect to see stronger small business growth in the 2nd half of the year. We also expect small business lending demand to grow in the 2nd half.
If lending does not also grow in the 2nd half, then supply side solutions may be required. But we think the money will be there as the economy recovers.