Is Small Business Lending Declining?

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Businesses say it often and if you’ve recently formed an LLC, you may have already experienced it: Small business lending is declining, at least according to small business owners in America. We’ve heard it, but is it true?

Washington has certainly capitalized on this issue. They have formed task forces, held round tables, and authored reports in an attempt to show small business owners that they care about this problem but until now, the evidence has been more anecdotal than factual.

According to a new study conducted by the United States Small Business Association with the help of the FDIC, small business lending has definitely declined in America. From June 2008 to June 2010, small business lending has declined 8.3% or $59 Billion.

While this shows a significant decline in lending, experts caution that measuring small business is difficult because different agencies have different standards for what constitutes a small business. Because of this, the SBA relied on date from the FDIC, the government agency that protects individual bank accounts for up to $250,000. Any loan of $1 million or less was counted as a small business loan.

The study also found that the problem wasn’t just a bank problem. The 3 year lag in the economy has resulted in a decreased demand for financing. The slower economy affects small businesses more drastically because there is less cash on their balance sheets to cushion when business slows down. This problem also causes businesses to not borrow because of the fear that the extra debt may put the business under more economic pressure.

The study also found that it wasn’t just small business lending that slowed down. Loans to larger businesses, or loans of more than $1 million, declined 8.9% during the same period suggesting that lending in general, as opposed to just small business lending, has slowed lifting the premise that small businesses are being unfairly denied funding.

Although the study appears to show that businesses large and small are being treated the same, when banks don’t lend at historically normal rates, larger businesses aren’t affected the same way. Large businesses can offer stock, easily attract private investors, and access alternate avenues of funding. Small businesses largely have one source of funding: A bank.

After many round tables, seminars, meetings, speeches, and conferences, a Federal Reserve report could only say that the problem of small business lending is multifaceted and that small business owners have an entrepreneurial spirit which will allow them to weather this storm by using their creativity and ingenuity.

This, of course, is little help to the business owner who has seen sales drop, expenses rise, and no access to funds to help weather the storm.