Fed Policy Analyst Addresses MVEDC, Valley Bankers
VIENNA TOWNSHIP, Ohio -- The quants in business are fond of saying that you can’t manage what you can’t measure.
A senior policy analyst at the Federal Reserve Bank of Cleveland might add that it’s just as tough to measure the health of something that eludes definition.
That senior policy analyst, Ann Marie Wiersch, addressed the annual Lenders’ Appreciation Breakfast sponsored by the Mahoning Valley Economic Development Corp. Thursday at the Avalon Golf & Country Club at Squaw Creek. Her topic was “Small Business Lending Trends,” more specifically, are small-business owners able to borrow the funds they need to start a business, remain in business or expand?
“Reliable data on small-business lending is lacking,” Wiersch said, in part because there is no agreed upon definition of a small business. Under the Affordable Care Act, 50 or fewer employees constitute a small business.
The U.S. Small Business Administration classifies enterprises by both employees and annual revenues. A manufacturer may have as many as 500 employees and qualify for SBA programs while a distributor can have no more than 100, an SBA spokesman said Thursday afternoon. A grocery store and a new car dealer can have up to $30 million in revenues and qualify while a clothing store can have no more than $10 million.
Commercial banks have varying dividing lines between small and middle market lending, some defining a small business as having annual revenues of $5 million or less, others $10 million and still others $50 million and less.
“Sixty percent of U.S. firms have five or fewer employees,” Wiersch said.
So to ask the question, “How are small businesses in the United States faring?” results in “conflicting accounts,” Wiersch said. Their health is improving but many are having trouble borrowing the funds because banks find lending to other segments more profitable. “Banks tell us that they’re interested on C&I [commercial and industrial] lending,” Wiersch related, “but some banks say that making loans of under $250,000 just aren’t profitable.”
The Great Recession changed the landscape for small-business lending. Banks tightened their credit standards in the aftermath and have not relaxed them to where they were before December 2007. “Many owners used home equity loans to finance their businesses,” Wiersch noted, “but the value of their homes fell” and they can no longer draw down as much on their lines of credit.
Unlike mortgage lending where the criteria are fairly uniform, applications can be scored and automated and the loan securitized, each small business loan is different and they cannot be bundled and securitized, Wiersch said.
The National Federation of Independent Businesses finds that small-business lending is less than robust because a recent survey found half of the owners are not looking to borrow and another 15% to 30% are discouraged. Banks might say they now are eager to lend “but there’s a perception that credit is tough to get,” the policy analyst said.
Large banks approve only 18% of the applications small-business owners submit, Wiersch said, citing Biz2Credit, while community banks approve closer to half. Another source, Pepperdine University, reports that 75% of mid-sized businesses had their loans approved but only 19% of micro-businesses.
Small-business owners report, “Access to credit is a bigger problem than finding qualified people,” she said, citing a New York Fed survey.
Wiersch has heard anecdotally that bank examiners’ scrutiny of documentation continue to make it tougher for banks to extend credit to small businesses. “Of late, their vigilance has resulted in less relationship, which can result in more terms and more collateral required,” she said.
Historically, community banks have accounted for most lending to small businesses but the bigger banks, well before the onset of the Great Recession, were devoting more of their resources to small-business lending.
Community banks find it harder to provide funds to small business customers for at least three reasons: changing technology (the expense of more advanced software), increased regulation and the time and manpower needed to prove they’re in compliance, and the changing habits of their customers (including mobile banking and doing their banking at computers in their offices).
Moreover, the number of commercial banks continues to shrink as a result of mergers and acquisitions, so small-business owners have fewer lenders to approach.
Hence it’s no surprise that job creation remains “lacking” the recovery since the Great Recession ended in June 2009 or that new business formation “is falling, even among high-tech companies.”
Last year, 2013, was the first year since 2009 that there was “more easing than tightening of credit standards” for small-business loans. Regardless, small-business borrowing remains at 78% of pre-recession levels adjusted for inflation.
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