Small-business lending has been in trouble, but is there an explanation beyond the widespread perception that banks are denying credit, and starving small entrepreneurs?
Clearly, the financial crisis and recession whacked banks and curtailed lending to small companies. Lending still hasn’t returned to prerecession levels.
But here’s an alternative view of the principal cause: A range of observers report that, in many cases, small businesses don’t want loans. Their sales are so weak they can’t justify taking on debt to expand operations.
“It’s the sheer lack of expectation that they’re going to grow their company,” says Bernie Kuechler, of Barlow Research Associates, which does market research for the banking industry. “A major driver is that companies are not applying for credit.” Barlow defines small businesses as companies with annual sales between $100,000 and $10 million.
Researchers at the Federal Reserve Bank of New York concluded that “although a tightened credit supply constrained some small firms, weak consumer demand for the firms’ products and services was a more pressing factor” for small businesses during the recession.
Those struggles continue and will only be exacerbated by Thursday’s stock-market selloff. The more the economy teeters, the weaker consumption gets.
“You hear banks are the problem, but our members don’t say lending is a problem,” says Cynthia Magnuson of the National Federation of Independent Business, which represents 350,000 small businesses. “This is a demand problem, not a lending problem, adds William Dennis Jr., who runs the NFIB’s research.
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