Lending Drops Amid Small Business Caution

Aug 6, 2012

Levels of lending to small businesses took a long dip this year, before recovering slightly in May. As WNPR’s Harriet Jones reports, it’s the first time since the height of the recession that borrowing has seen a prolonged decline.

It’s often said that credit is the lifeblood of a small business. And therefore when small businesses aren’t getting loans, it’s significant.

“Small business is at the forefront of the economy.”

Bill Phelan runs PayNet, a firm that tracks small business lending.

“They react very quickly to changes in economic conditions. In fact they see demand change daily as it walks through their front door. And they can make decisions very quickly. And so what we’ve found is that this index is a good leading indicator of gross domestic product.”

His company compiles an index of small business lending from data it receives from lenders all over the country on a monthly basis.

“Think of it like a stock ticker for small business economy. And it’s a good beat on what these small business owners are doing in terms of expansion of their business.”

And what he found in the early months of 2012 was disturbing. Levels of borrowing by small businesses slid in January, February, March and April, before posting a recovery in May. It’s the first time those numbers have taken a four month slide since 2009, the height of the recession.

“It signals to us a negative short term outlook for the future of the economy. And that doesn’t bode very well for very robust gross domestic product over the next two to five months.”

But what’s really happening here – are credit conditions tightening again, so that small businesses can’t qualify for loans, or are the businesses themselves becoming more cautious about taking on debt? Bill Phelan says his data is clear.

“It’s actually a demand for credit that’s at issue here, not a supply of credit. We’ve actually seen the lending standards start to widen out. The lenders are very eager to make loans again, because that’s how they make money.”

Mike Paine runs Paine’s Recycling and Rubbish Removal in East Granby. His 70-employee business is highly capital intensive.

“We spend easily over a quarter of a million dollars for a truck, and we’ve got 65, 67 trucks – it’s expensive to be in our business, but you’ve got to have the trucks.”

And he confirms that in his experience banks are currently willing to work with small businesses – it’s not lending standards that are having a chilling effect.

“For us they were actually tighter three years ago. But we’ve been able to, because we really pay attention to paying our bills and taking care of both internal and external customers, we’ve done ok.”

But says Paine, since the recession, businesses do think very carefully before committing to debt.

“Getting money at the right price is very critical. And just because you can get a loan, it doesn’t mean you can afford to make those payments back.”

Small businesses may also be diversifying when it comes to accessing credit. The state of Connecticut’s Small Business Express package has been hugely popular with its low interest rates and grant money. Donna Wertenbach of the Community Economic Development Fund in Meriden says the recession has also made small businesses aware of non-traditional lenders.

“I think that businesses haven’t quite caught up with the fact that banks are lending again. And so they’re not approaching banks as frequently as they might have been in the past. And I think as a result of this recession, many small businesses have learned about other resources that are available to them, and they’re plugging more and more into those resources.”

The Federal Reserve Bank of New York also keeps a close eye on small business lending in the tri-state area. They do so through a monthly, voluntary survey of business owners. Claire Kramer told a recent conference in Hartford the lending picture is complex.

“We’ve got some really robust growth sectors in our economy right now. We’ve got tech, health and life sciences have been growing. Professional and businesses services in the tri-state area has seen pretty robust performance in the last couple of years, even in uncertain economic times.”

Kramer also said that businesses who were questioned about their reasons for seeking credit had an interesting story to tell.

“Cutting costs was fairly popular – I think that people are still trying to increase efficiency in their business operations. They’re still trying to do more with less. But we also heard, equally, that they’re actively cultivating new clients, that they’re developing new products and services. They’re trying to position themselves for growth.”

Whether that growth is successful in growing the general economy and in particular jobs, remains to be seen.

For WNPR, I’m Harriet Jones.