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Small Business Lending Down Again

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Just when we start to see some improvement in the small business lending environment, another report emerges appearing to indicate that very little has changed. The United States Small Business Administration recently released a survey showing the amount of money lent to small businesses has dropped not only in the first quarter of 2011 but all the way back to 2008.

This is not welcome news to the many small businesses who not only count on lending to expand their businesses but also for those businesses who use lenders to meet short term obligations such as payroll and capital requirements to complete larger projects or bids. According to the Small Business Administration, small business lending peaked in 2008 when more than $700 billion was lent to small businesses in America. That number has steadily declined. In 2009, that number decreased to approximately $695 billion.

One of the many devastating effects of the so called Great Recession can be seen in these numbers as well. In 2010 that amount of money lent plummeted to slightly more than $650 billion and continued to drop to a low at the beginning of 2011 of $609 billion. What may be even more  alarming is that the most recent number of $609 billion represents twice the amount of decline as was present from the third quarter and forth quarter of 2010. This appears to indicate an acceleration of decline which may indicate that banks are becoming increasingly fearful that small businesses will default on their loan obligations.

Not so fast, says SBA economists. Banks have been loosening their lending standards as the economy has shown signs of recovery and incentives like increased subsidies from the SBA have been available. Healthy lending rates are affected by two factors: The amount of money banks are willing to lend and the amount of requests they have from businesses. SBA economists believe that the decline in lending may be more from the lack of demand from small businesses.

Although the economy appears to be recovering slowly, small business owners are not only cautious of the future but also paying down debt incurred during the recessionary environment of the past few years so rather than expanding their business, they’re shoring and cleaning up their books to be better prepared for future economic pressures.

Although the decline in lending will be seen by some as more evidence that the economy is still in an extremely fragile state, it may also indicate better fiscal habits on the part of small business owners which may produce more healthy businesses in the future.