Small Business Access to Credit in a Deep Recession

Summary of Remarks by
William J. Dennis, Jr.
NFIB Research Foundation
January 28, 2010

The weakened credit markets, yet another symptom of the Great Recession, have negatively impacted small businesses in the United States. Mr. William (Denny) Dennis and the National Federation of Independent Businesses (NFIB) Research Foundation has recently conducted a survey in order to assess the current credit conditions to small business employers, assess the demand for credit, both filled and unfilled, and determine what the role of the real state market is in small business financing. This survey, conducted in November-December 2009, has collected a large number of data from small business throughout the United States, and to no surprise, the data reveals small business access to credit has gone down and will remain that way until the real estate market improves.

The survey was prepared in-house at the NFIB and conducted by telephone by the Gallup polling company. It included businesses ranging from 1-250 employees (owners excluded) and used a stratified random sample of N=751, as a majority (60 percent) of small businesses have fewer than four employees and they wanted to look at both larger and smaller small businesses.

The results showed that loan availability is “down and staying there.” The 2009 levels are the lowest since 1986. Although the US experienced a big drop during the 1980 recession, it jumped back rather quickly, a phenomenon that has not occurred during the current recession.

When asking small business owners what they perceive as the most important immediate problem, 51 percent report that poor sales are their most pressing concern, while credit access is only 8 percent. Regardless, access to credit had increased steadily from 2003 onward, peaking in 2008, and has drastically decreased from mid-2008 through 2009. When it comes to types of credit, the survey data shows that access to credit lines is the biggest problem, with 10 percentage points of small business owners having fewer lines of credit than from just one year ago. Mr. Dennis added that it is not just the number of borrowers that have decreased, but also the number of lines per borrower.

The survey looked at both those businesses that attempted to borrow and also those that were chose not to or were discouraged to borrow in 2009. Of those small business owners that attempted to borrow, 23 percent obtained none of what they wanted to borrow. He added that those that did successfully borrow may have attempted to obtain more under normal market conditions but were discouraged in this environment. When comparing credit needs satisfied in 2006 and 2009, 31 percent reported that the received all the credit they wanted in 2006, compared with only 22 percent in 2009, and only 4 percent got none of what they wanted in 2006 versus 13 percent in 2009. When asked how much credit conditions are tightening in the past three months versus the past three years, more reported that they have been getting tighter in the past three months than in the past three years. Clearly, Mr. Dennis pointed out, things are not getting any better at this point in time.

Access varied depending on the type of credit the borrowing was seeking. For instance, new lines of credit were the most difficult to get, with only 33 percent of attempts being successful, while credit cards were the easiest with a 74 percent success rate. However, it is important to point out that 20 percent of each credit type was accepted with complaints over terms and conditions or rejected because of them. One problem in looking at the survey data is how to classify those loans that were rejected due to terms and conditions: is it acception or rejection?

The survey broke down credit access by types of loans, credit lines, and credit cards. In 2009, small business owners had 70/30 odds of getting a vendor loan, but only 45 percent successfully obtained a business loan. As for credit lines, two out of three of those surveyed were able to renew credit lines, but only about one in three were able to open new credit lines. Credit cards proved to be the easiest to obtain, with three out of four success rate.

Seventy percent of those surveyed said that they planned to use the credit for cash flow, as opposed to increasing inventories or further investment. A question that lingers is what the companies who did not receive credit do to maintain operating expenses.

Another issue impacting small businesses was the unilateral changes made by financial institutions in terms and conditions of existing credit lines, loans, and cards. Of those surveyed, 42 percent reported that they experienced interest rate hikes in lines of credit, 52 percent experienced interest rate increases for credit cards. Additionally, only two percent had credit lines cancelled, while 11 percent experienced credit card cancellations. 43 percent said that the changes to credit lines (47 percent for credit cards) were “more irritating than harmful,” as many of these companies must pay off their balance at the end of the month and interest rates may not be a significant concern. Loans appeared to be the type of credit that had the most negative impact.

Mr. Dennis remarked that the conditions in the real estate market have a significant effect on credit access to the small business community. Ninety-three percent of small business owners own their own home, 50 percent own their business premises, and 39 percent own real estate for investment purposes. Survey data show that in one out of five cases small business owners have second mortgages, most likely to finance their businesses. Additionally, 13 percent reported they own upside-down properties. Mr. Dennis questions how a small business owner can borrow when there is so much real estate on his balance sheet, especially when the value of real estate has gone down so much in the past few years. Clearly, he shows a link between the creditworthiness of small business owners due to their real estate holdings and their access to credit. He does point out, however, that there is increasingly more investment and business premises mortgaged for business purposes, which is not true for residential properties, and this may be a factor that will weigh in favor of small business lending.

In short, the NFIB survey shows that small businesses are suffering from poor sales, credit is much more difficult to get now than prior to mid-2008, access to credit lines is the principle problem, unilateral lender changes have negative consequences, and small employer real estate ownership also has an impact on extending the woes of the small business, and thus the Great Recession in the United States.

Mr. Dennis, with more than 30 years at NFIB, directs the research programs of the foundation. He writes and speaks frequently in the United States and throughout the world on policy-related small-business topics. Dennis is past President of the International Council for Small Business (ICSB). He is also a fellow of ICSB as well as a fellow of the United States Association for Small Business and Entrepreneurship. The Small Business Administration honored Dennis with its Special Advocacy Award, recognizing him as “one of small business’ most committed advocates, with considerable expertise in small-business research.” The Academy of Management also honored him with an Advocate Award for “outstanding contributions to the field of entrepreneurship.”

Rapporteur: Nicole Firment

 

 

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