Improve Access to Capital

The ongoing credit crunch continues to stifle America’s entrepreneurs

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Small-business owners face unique challenges when trying to obtain financing. Start-up and expanding small businesses frequently do not have the assets necessary for a traditional bank loan. Smaller loans generally are less-profitable for banks, and come with a higher default rate. Additionally, the proper valuation and credit worthiness of small businesses are notoriously difficult to determine. Ongoing bank consolidation and failure has lead to fewer community banks and fewer character-based loans as well. Exasperating the situation, the U.S. economy still is reeling from the worst financial crisis since the Great Depression. In short, America’s entrepreneurs—existent and aspiring—continue to suffer through a credit crunch.

More than a third (36 percent) of the small-business respondents to NSBA’s 2010 Year-End Economic Report asserted being unable to obtain adequate financing. According to a recent U.S. Small Business Administration (SBA) Office of Advocacy study, small-business lending dropped by 6.2 percent in Fiscal Year (FY) 2009-2010. This translates into a drop of $43 billion. Compared to June 2008, the total value of outstanding loans to small firms plunged by 8.3 percent—or $59 billion. According to the report, business loans under $100,000 declined by one percent in 2009-2010. This is an improvement from the previous year, when these loans decreased by 5.5 percent.

Aggravating this state of affairs is the persistently tight small-business lending standards employed by banks. In its January 2010 quarterly Senior Loan Officer Opinion Survey, the Federal Reserve reported that only 5.3 percent of banks eased credit conditions “somewhat” for smaller firms, while 3.7 percent tightened conditions. Larger firms fared better, with 12.3 percent of the 57 U.S. lenders surveyed reporting that they eased credit “somewhat” and only 1.8 percent reporting that they tightened it. Banks also have been raising the costs of their credit lines and the premiums they charge for higher-risk loans for those entrepreneurs fortunate enough to qualify under the tightened standards.

The lending programs at the SBA play an important role in this capital vacuum, and NSBA continues to urge Congress to recognize and protect this critical agency and its lending objectives. The SBA must remain a strong and fully-funded agency, with a robust and attractive lending program. SBA lending has been a somewhat solitary lending bright spot in the last year, as the small-business provisions of the American Recovery and Reinvestment Act (ARRA)—and the extension contained in the Small Business Jobs Act—had a demonstrably positive effect. In FY 2010, SBA supported more than $22 billion (54,833 loans) in lending to small businesses through its 7(a) and 504 loan programs. This is compared to more than $17 billion (47,897 loans) in FY09. The average weekly loan volume for FY10 was $333 million, which represents a nearly 30 percent jump in SBA lending from FY09, when the average weekly loan volume was $258 million. If the credit crunch persists, NSBA urges Congress to consider temporarily reinstating the 90 percent guarantee on SBA 7(a) loans and eliminating the borrower fees on both 7(a) and 504

NSBA also urges Congress to increase credit unions’ small-business lending cap. If the nation’s credit unions stand ready, willing, and able to increase their lending to small firms beyond their current statutory cap of 12.25 percent of assets, then Congress immediately should unleash this lending potential.
 
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