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Do businesses want to borrow?

By Marcie Geffner ·
Monday, January 31, 2011
Posted: 9 am ET

Access to capital in the form of bank loans is crucial to the operation and expansion of many small businesses. While there's no question that capital has been "crunched" in the Great Recession, the debate over whether small businesses can -- or can't -- get bank loans today is apparently still open.

The National Small Business Association, or NSBA, a trade group in Washington, D.C., issued a 2010 midyear economic report that contained these observations about the state of small-business financing:

  • 80 percent of small-business owners in one survey said the credit crunch had affected their company.
  • 41 said they couldn't obtain adequate financing for their needs.
  • Among those who'd had difficulty obtaining capital, 44 percent said they were unable to expand their business, and 20 percent said they had to cut employees.
  • 29 percent said lack of available capital was the most significant challenge facing their business.
  • 24 percent said they'd received less favorable loan terms in the last year.
  • 2 percent said loan terms had become more favorable.

"Although lower demand for loans from small-business owners who are typically hesitant to take on additional debt in a distressed economy may be a part of the equation, the decrease in loans is more likely related to the terms and availability of such loans. Many banks appear unable or unwilling to lend affordable capital to any small businesses that doesn’t meet their extremely high definition of a "creditworthy" small business," the report stated.

This month, the American Bankers Association, or ABA, also in Washington, D.C., issued its own take on why business have received fewer loans.

In "Lenders and Borrowers are Exercising a Careful Approach to Credit," the group stated: "Many businesses either do not want to take on additional debt or are not in a position to do so, given the falloff of their customer base. Thus, despite improvement, loan demand remains weak. Businesses are actually utilizing less of their credit lines, further demonstrating the slowdown in loan demand."

The report also said, "Bankers report that small businesses are returning to test the market for loans, even though they may not wish to borrow at the moment. It will take time for this renewed interest to be translated into new loans made, however."

So who's right: The bankers or the small businesses?

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Claes Bell
February 03, 2011 at 10:15 am

I've often wondered the same thing! I always hear about a credit freeze slowing down business, and I wonder how that can even be possible with the Fed lending money to banks at essentially zero percent. But banks are always blaming the dearth of small business lending on diminished demand. I think the GAO needs to do some kind of a study of this, because if taxpayers are going to be subsidizing the banking system to the tune of billions of dollars, we should at least be assured that they're doing enough business lending to provide some sort of a benefit to the economy.