Small Business Credit Still Not Back to Pre-Recession Levels
At the beginning of July, Thomson Reuters reported that its PayNet Small Business Lending Index had hit its highest level since March 2007, suggesting that small business credit markets had recovered from the financial crisis and Great Recession.
I’m not so sure. Several data sources indicate that small businesses still lack the level of credit access they had back in 2007.
PayNet’s Small Business Lending Index shows that lenders tracked by the company made 12.9 percent more new loans and leases to small companies (businesses with less than $1 million in outstanding loans) in May 2014 than they did in November 2007. However, the index’s rise needs to be put in context.
PayNet’s measure has a natural upward trend because it tracks the number of loans and leases made by lenders without adjusting for the number of small businesses in the economy, which tends to rise over time. Between November 2007 and December 2013, for instance, the PayNet Index rose by 8.8 percent. That’s not much more than the 8.2 percent increase in the number of filings of corporation, partnership and sub-Chapter S tax returns between 2007 and 2013 reported by the Internal Revenue Service.
The value of commercial and industrial loans remains well below pre-recession levels. The Small Business Administration reports that the dollar amount of commercial and industrial loans of less than $1 million – a common proxy for small business lending – was 22.2 percent lower in June 2007 than it was in March 2014 when measured in inflation-adjusted terms.
Small business owners report that credit is harder to get now. Twenty-four percent of the small business owners responding to the second quarter 2014 Wells Fargo-Gallup Small Business Index, a representative survey of small business owners conducted every three months, said that getting credit was difficult, as compared with only 13 percent of small business owners in the fourth quarter of 2007. Similarly, only 25 percent of small business owners reported that getting credit was easy in the second three-month period this year, versus 50 percent in the final three months of 2007.
A smaller fraction of small business owners say they are borrowing now than said so in 2007. The share of small business owners that told surveyors from the National Federation of Independent Business that they had borrowed in the previous three months was four percentage points lower in June 2014 than it was in November 2007 (28 percent versus 32 percent).
The portion of small business owners whose business credit needs are satisfied is lower now. In June 2014, 27 percent of small business owners surveyed by the NFIB reported that their borrowing needs had been met, as compared with 32 percent in November 2007. Six percent said their demand for credit was not being satisfied in June of this year, as compared with only four percent in November 2007.
Small business loan requests are less likely to be approved now than they were before the economic downturn and weak recovery that followed. The New York Times reported that large banks’ approval of small business loan requests was 20 percent in June of 2014, as compared with 36 percent before the Great Recession.
Despite the recent rise in the number of small business loans, small business lending still has not returned to pre-recession levels, six-and-a-half years after the Great Recession began and five years since it ended. Moreover, commercial banks continue to turn away from small business borrowers. Small loans declined from 30 percent of the value of commercial and industrial loans in 2007 to 21 percent in 2014, and from 36 percent of the number of loans to 25 percent, over the same period.
Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).