The National Small Business Association 2010 Mid-Year Economic Report shows that the lack of small-business access to capital is getting worse, not better.
Nearly one-third of small-business owners surveyed said a lack of available capital is the most significant challenge for their business. This number has increased from 24 percent six months ago.
Only 59 percent of small businesses said they are able to obtain adequate financing, which is a decline from 78 percent in August 2008 and 61 percent in December. That leaves 12 million small businesses that cannot obtain adequate financing.
Since 1993, when the small business association began this particular survey, there has been, not surprisingly, a direct correlation between access to capital and job growth. Small businesses add more jobs when there’s more liquidity.
Small-business owners who couldn’t get loans said they had to lay off employees, were unable to expand and couldn’t increase inventory to meet demand, according to the NSBA report.
As credit terms continue to worsen, fewer small-business owners are seeking loans. In the past year, 24 percent of owners reported less favorable terms on their loans.
“Many banks appear unable or unwilling to lend affordable capital to any small business that doesn’t meet their extremely high definition of a creditworthy business,” the report stated.
Banks, however, have begun to ease lending standards slightly for large companies, according to a Federal Reserve Board senior loan officer survey in April. Nineteen percent of large banks had eased credit standards for large businesses, while only 3 percent did so for small businesses.
As if that weren’t bad enough, there was also a net tightening of loan terms to small businesses from smaller banks — mostly because small banks are about the only banks left that will still make “character-based” loans. Bankers at smaller institutions cited a less-favorable economic outlook as the reason for their decreased tolerance for risk.
Although four national and international banks, JPMorgan Chase, Bank of America, Huntington National Bank and Wells Fargo, pledged to increase small-business lending by $12 billion this year, so far, only BofA is on target to reach its goal.
Bankers say that these goals will be difficult to achieve because demand for loans has decreased and fewer small-business owners are credit-worthy.
Yet small businesses remain the workhorse of the economy — notably so after a recession. Smaller and more agile, they are light on their feet and able to recover faster.
In the early 1990s, after previous economic downtowns, small firms — those with 500 employees or fewer — actually increased their net employment in the first year after the recession, while large businesses continued to downsize, according to the Small Business Administration’s Small Business Economic Indicators for 2003.
And from March 2000 to March 2001, small businesses added 1.15 million net new jobs, as large businesses lost 0.15 million net jobs.
On the bright side of access to — albeit an expensive form of — capital, the Credit CARD Act, which went into effect early this year, did not, as some had feared, make credit cards more difficult to obtain and expensive for small-business owners.
The number of owners reporting worsening terms hit 64 percent in December, but after legislation was implemented, this number declined to 48 percent.
Interest rates on credit cards remain high for small-business owners, but not directly because of the legislation. Although the average interest rate is 16 percent and nearly one-quarter of small-business owners pay 20 percent or more, this has held steady since December.
First Commercial Bank celebrated its first anniversary at its downtown location this week.
All week long, clients stopped by for refreshments and to chat with market President Jack Kerr, and employees Doreen King, Cleon Curtiss and Nancy Van Tine.
Oklahoma City-based First Commercial opened a branch in Lone Tree, Colo., in 2008, and expanded last year to Colorado Springs. This year the bank also added branches in Highlands Ranch and Englewood, Colo.
Founded in 1996, the community bank has six branches in Oklahoma and four in Colorado.
Rebecca Tonn can be reached at firstname.lastname@example.org or 719-329-5205.