Posts Tagged ‘Access to Credit’

The Small Business Massacre

Wednesday, December 9th, 2009
Not Good News

Not Good News

David Goldman appeared on Larry Kudlow’s CNBC program to discuss the “massacre of small business”. Policymakers have belabored the point that small businesses have led job creation in all post-war economic recoveries. That is not the case now as job losses at small businesses exceed those of large ones. Goldman pointed out that the household survey, based on telephone interviews with a large sample of randomly chosen households, shows that 558,000 Americans lost their jobs in October, but large businesses reported a decline of only 190,000 jobs. So small businesses are disproportionately affected by the economic downturn, doubtless due to the contraction in commercial credit. Business lending is down 13% year on year and according to the recent report of the Federal Reserve Bank, most banks continue to “tighten lending standards”.  Small businesses are choked of credit as all lines, including home equity and credit cards, are tightened. Without access to capital, small businesses fail. Indeed, Moody’s reported that the global speculative default rate is at 12%, an all-time high since the Depression. The capital access disaster is exceeds all natural disasters in severity, owing to bad economic policy.

Imbalance Between Supply and Demand

Friday, July 10th, 2009
All Dressed Up and Nowhere to Go

All Dressed Up and Nowhere to Go

Banks claim to be lending, but small businesses claim it is harder than ever to get loans. Which side is right? Both! Reports of tightening access to credit are consistent. In a survey conducted by the National Federation of Independent Business, 14% of small businesses across the U.S. reported that loans were difficult to obtain in April relative to March. This is the highest percentage since the 1980 – 82 recession. At the same time, two-thirds of the small businesses surveyed also reported that the interest rates on their credit card accounts had increased. On the other side, the monthly reports collected by the Federal Reserve Bank reveal that 60% of bank loan officers report that their loan volumes have declined for insufficient demand.

Each side has responded to the financial crisis with caution. Banks have raised lending standards, such that small businesses that used to be able to access loans with FICO scores of 650 now find that the hurdle is 720. At the same time, small businesses are reluctant to assume additional debt, given the uncertainties in the current economic environment. Apparently banks and small businesses agree on one thing: keep as much cash on the balance sheet as possible at this time.