Small-Business Loan Forecast: A Brighter Second Half for 2011
Small-business lending is clawing its way back.
In the first quarter of 2011, the number of small-business loan requests that won approval from small and large banks rose to 1,294, up more than 50 percent from the 852 requests landing approval in first quarter of 2010, according to the New York-based small-business lending and credit service Biz2Credit. The company defines small businesses as those with fewer than 500 employees and $6 million in revenue.
"It's coming back," says Maria Coyne, executive vice president of business banking for the Cleveland-based KeyBank, which is the small-business and consumer banking arm of financial services firm KeyCorp. "The people who've been on the sidelines are now starting to think about expanding, adding employees and adding equipment."
And they're getting a friendlier reception from banks. Not only have some banks relaxed their credit standards for small businesses since 2010, demand for loans is beginning to recover. About 10 percent of banks reported stronger demand for loans among firms with less than $50 million in annual revenues in the first quarter of the year, according to the Federal Reserve's April Senior Loan Officer Survey. In the previous survey from January, only about 5 percent of banks reported strengthened loan demand from small firms.
What's more, certain banks are upping their small-business ante. Last month, JP Morgan Chase announced it would increase its commitment to lend $12 billion to U.S. small businesses in 2011 -- a 20 percent increase over 2010.
Despite the rosier loan picture, outside economic shocks caused by everything from Mother Nature's continuing pummeling, higher gas prices and the billowing national debt could certainly throw off any kind of small-business recovery. Here are three lending predictions from Coyne that just may come to fruition during the second half of 2011, barring another national catastrophe.
- Demand for loans will pick up.
"Through 2008 and 2009, you saw a lot of companies deleveraging. We also saw a lot of companies failing. The survivors got smart about managing expenses through the crisis. And they figured out where they're making money and where they're not. But now they know the only way up is through revenue growth. People are actually borrowing to add employees and boost their sales staffs.
"They're also taking advantage of existing opportunities. Perhaps they've explored other ways to sell their products or services or expand into new markets and now they need to borrow to bolster their inventories. Maybe they're taking advantage of existing tax credits to purchase heavy equipment that can help a company be more efficient. Or they're buying the building where they used to rent to cash in on lower interest rates. Some businesses are even snapping up other businesses for a song."
- The secondary market for small-business loans will continue to recover.
"So far, the secondary market -- that is, the aftermarket where small-business loans are resold to investors -- appears to be moving freely again. Small Business Administration-backed loans, which come with a guarantee of 75 percent to 85 percent, for example, have come back pretty robustly. The market for re-selling small-business loans was almost nonexistent during the downturn when investors ceased buying for fear of defaults. Having a free flowing secondary market, however, bodes well for small businesses because as banks sell-off the loans on their books, they tend have more cash to make added loans."
- Reduced credit scores will continue to cause problems. "During the downturn, many business owners' personal credit scores suffered, as did the value of their collateral. And since business sales likely also fell off, their cash flow got pinched. So, virtually everything that goes into an underwriting decision had changed. That's what made it harder for people to qualify for loans. People's lingering credit-score problems may continue to make it difficult for them to get loans. But the thing for borrowers to be aware of is what caused the drop in their scores and to be able to explain how the situation's been remedied. Over time, a score will correct itself."