Tuesday, January 06, 2015CLEVELAND -- While loans to large businesses “have soared to record levels,” lending to small businesses, although improving, continues to lose ground, says a report the Federal Reserve Bank of Cleveland released Monday.
The author of the report, Ann Marie Wiersch, is a senior policy analyst in the community development department of the Cleveland Fed. She was the keynote speaker in Vienna Township at a breakfast last March 13 the Mahoning County Economic Development Corp. held for small-business owners and the commercial lenders at banks that serve the Mahoning Valley.
Her report is “Good News and Bad News on Small Business Lending in 2014.”
Much improved since the end of the Great Recession is the financial health of small businesses across the United States, Wiersch found. They find it easier to obtain credit and banks have relaxed their standards a bit since 2009. That’s the good news.
The bad news: She used bank commercial loans of less than $1 million to small businesses between July 1, 2004, until June 30, 2014, as an indicator of their willingness to lend. She compared that to both loans they extended over the same period to large businesses and all bank lending.
In 2014, loans of $1 million or less to small businesses were 2% lower than in 2005 while loans to large businesses had risen 44.3% and total banking industry assets grew 31.4%.
Between July 1, 2008, and June 30, 2012, Wiersch’s data show, the volume of loans to small businesses “dropped significantly and has barely recovered. Small-business loans now stand at 17% below the peak reached prior to the recession.”
Commercial loans of less than $1 million that banks extended last year were 3.4% higher than 2013. “This modest improvement does not provide strong assurances about the health of lending [to small businesses]," she writes.
Also affecting lending is demand from small-business owners. “Many small businesses are still recovering from the recession and demand for loans is tepid,” she writes.
Loans of more than $1 million made to larger businesses “bounced back quickly” after the recession ended in June 2009 and “loans outstanding now are more than 25% higher than pre-recession levels.”
Wiersch used surveys conducted by the National Federation of Independent Businesses (NFIB) and the Wells Fargo/Gallup Small-Business Index to explore why small-business owners’ “demand for credit is somewhat soft.”
Both surveys show that optimism among small-business owners has risen since 2010 but has not returned to the levels the owners had in 2005, 2006 and early 2007. The NFIB Optimism Index hit 100.7 in October 2006, plunged to 81 in March 2009 and was 96.1 at the end of June.
The Wells Fargo/Gallup index peaked at 114 in late 2006, plummeted to minus-28 in 2010 and its most recent reading, obtained in mid 2014, was 58.
Despite the recovery overall, the benefits have not reached small businesses to the same extent as large businesses. The most recent Wells Fargo/Gallup survey found that 60% of respondents described their situations as “very good” or “somewhat good.” That’s better than the 48% who so responded in early 2010 but far short of the 72% who checked those boxes in late 2007.
Small-business owners’ assessments of their cash flow showed similar patterns. Fifty-five percent described theirs as “very good” or “somewhat good” last year, up from 36% in 2010, but below the 62% in the last quarter of 2007.
On other measures of financial strength, both the NFIB and Wells Fargo/Gallup surveys reflect small businesses are doing better. The NFIB survey found small businesses reporting higher sales than they had booked the preceding quarter.
Both surveys, however, found a weaker demand for credit than before the Great Recession. In early 2007, not quite two years before the Great Recession began, nearly 40% of the small businesses queried said they borrowed regularly, that is, at least once a quarter. Last October, that figure was 28%.
Capital spending and capital spending plans showed similar drops.
Published by The Business Journal, Youngstown, Ohio.
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