Small Business Loans Still Difficult

 August 14, 2012

Brian Nearing

Banks’ continued reluctance to lend money to small businesses remains a problem with the sputtering economy in New York, according to a poll released Monday by the Federal Reserve Bank of New York.

The bank’s annual Small Business Borrowers Poll found seven small businesses in 10 that sought loans were either denied or got less than sought, said study author Claire Kramer, an officer in the Fed’s Department of Regional and Community Outreach.

“Businesses continued to cite obstacles to obtaining credit,” Kramer said during a conference call with reporters from Fed offices in New York City. Poll results were based on data collected during the first half of this year from about 550 small businesses in New York, northern New Jersey, and Fairfield County, Conn.

The Federal Reserve has been pursuing a low-interest rate policy to encourage more people to borrow money to invest in businesses, which in turn would create more hiring and boost payrolls that would fuel more demand for products. Rates are now at historic lows but job creation has been sluggish.

Mike Durant, New York state director of the National Federation of Independent Business, said his members are complaining less about tight credit, and more about stagnant sales to skittish customers worried about their own jobs. “I think this issue of access to credit is being overstated,” he said.

Indeed, Monday’s poll also showed that small businesses are selling less to customers. This year, 46 percent of businesses reported decreased sales, up from 34 percent in last year’s poll. The share of businesses reporting stable sales dropped from 28 percent to 18 percent, while businesses reporting increased sales dropped from 38 percent to 36 percent.

Kramer cautioned against comparing last year’s poll to this year’s, because the same businesses did not respond to each poll, which is based on voluntary responses. Last year’s poll was answered by about 880 businesses.

The current poll appeared to show that business, much like consumers, appear to have wrapped up with cutting debts during the last year. Only 8 percent of businesses reported they were using money to reduce debt, down from 19 percent the year before.

And the share of businesses that sought loans, either for new accounts or extensions on current credit, jumped from 33 percent to 41 percent. Nearly eight businesses in ten that applied said they needed a loan to cover day-to-day operations like cash flow, payroll and inventory; that was up from 62 percent the year before.

The new poll did show that banks had apparently tightened up lending standards, making credit harder to obtain. Three main reasons for loan denials were all up — Insufficient collateral (28 percent from 19 percent the year before), low credit score (25 percent from 20 percent) and weak sales (23 percent from 21 percent.”

And the Fed poll added a new question that drew the largest response — 42 percent — that banks were “just not lending to my type of business.”

Kramer said that question was added to this year’s poll based on answers given by business focus groups prior to the poll’s design. Roughly a third of the businesses that gave that answer were construction firms, she said; that could reflect the continued slump in the real estate market.

Business owners talk much more about sluggish sales than about credit woes, said John Tattersall, president of the Chief Executives Network, an affiliate of the Albany-based Center for Economic Growth, which represents business owners in an 11-county area including the Capital Region.

“Clearly sales are the number one issue. People who are doing well don’t have a problem getting credit. That can be more of an issue for someone who wants to try something new, or wants to expand,” he said.

The odds of getting a small business loan appear to be significantly lower than the year before. This year, 13 percent of businesses that sought new lines of credit got approved; last year’s poll had that at 33 percent.

Firms with existing lines of credit that sought extensions got approvals this year in 17 percent of cases; that approval rate last year was 52 percent.