Lacking Credit, or Customers?
Clearly, federal efforts are not leading to more borrowing by small businesses. The SBA’s primary programs, the 7(a) and 504, yielded 35% fewer bank loans between September 2008 and September 2009 than the same period a year before. Since ARC loans became available in June, just $116 million of the $255 million allocated had been loaned out as of the end of October (the program can run as late as September 30, 2010).
Meanwhile, small-business owners speculate that government efforts at banking reform may be exacerbating problems associated with other forms of finance. In particular, credit-card issuers are rushing to raise rates and apply them to existing balances ahead of new federal restrictions slated to take hold in February 2010. In response, Sen. Christopher Dodd (D–Conn.) has proposed an emergency ban on applying the new rates to existing balances.
Some argue that the contraction in small-business credit is actually due to a lack of demand. Most entrepreneurs self-finance as much as possible, say experts, and seek a loan only as a last resort or for an extraordinary growth project. Now that new hiring and many capital expenditures are on hold, debt is the last thing small businesses want.
In fact, only 10% of the 827 small-business owners surveyed by the National Federation of Independent Business (NFIB) in September said they couldn’t get the financing they wanted, and only 4% named financing as their top concern. “The primary problem facing small-business owners right now in terms of job creation is not access to credit, but a lack of sales, customers, and confidence,” says William Dunkelberg, chief economist for the NFIB and also chairman of regional lender Liberty Bell Bank. “You could give them more money, but for what?”
But plenty of small-business owners and advisers say the problem is that banks are sitting on the funds they’ve received from federal programs in order to boost their balance sheets. “More than half of our customers would be able to accelerate growth plans and add jobs with access to additional capital, but they’re absolutely handcuffed right now,” says Jamie Pennington, co-founder of Flexible Executives, a temporary-staffing firm.
Banks counter that an increase in SBA guarantees doesn’t increase the funds they have available for SBA lending. Ted Morgan, senior vice president at BNB Bank, says “it’s still the banks’ money” getting loaned out, and that SBA loans still mean a loss for banks if a borrower defaults, even with the government backing. While the increased guarantee level helps a lot, he says, the SBA is simultaneously tightening its standards for what qualifies as a reimbursable loan loss, meaning many banks are increasingly wary of being left holding the bag.
All told, Morgan says, the government’s efforts in the stimulus package had a huge impact on lenders, and the 35% drop in SBA loan volume “was a heck of a lot better than it would have been otherwise.”
That drop in volume can also be attributed to a drop in the number of lenders. CIT Group, once the top SBA originator, cut its loans by 86% (in dollar volume) between September 2008 and September 2009, as the firm teetered and then fell into bankruptcy. “For every CIT, you have to come up with 25 community-bank lenders,” says Charles “Tee” Rowe, CEO of the Association of Small Business Development Centers.