Getting Small Business Credit Access “Just Right”
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You might not know it from looking at him, but Federal Reserve Chairman Ben Bernanke has a lot in common with Goldilocks when it comes to efforts to manage small business credit, according to this opinion piece in BusinessWeek.
Scott Shane, professor of entrepreneurial studies at Case Western Reserve University writes:
Small business credit can be too hot, with lenders providing too much financing, or it can be too cold, with too little available. The Fed’s job is to get the amount of credit just right, ensuring that the banks provide creditworthy businesses with the capital they need while denying it to those that are too weak to handle the debt.
Shane goes on to cite a study from the National Federation of Independent Business that reports that 2011 saw an increase in the number of small employers shut out of the credit market.
And while lenders argue that they are lending, the statistics paint a far different picture. Figures from the Federal Deposit Insurance Corporation reveal a 39% decline in the number of loans under $1 million to businesses (a proxy for small business loans) since June 2007. The current level is the lowest since 1999, when the U.S. had almost 1 million fewer small businesses than today.
Federal Reserve Chairman Ben Bernanke (call him Goldilocks) needs to get the banks to loosen up their lending standards if he wants bring the small business credit market to the right temperature.
But, Shane warns, credit should not be too easy.
When credit is too easy to get, business owners fail to fix problems, responding to cash flow issues by borrowing, instead of boosting revenues or cutting costs. They are also slow to shut down failing operations, escalating commitment, and ultimately making bad outcomes worse than they need to be. Finally, when credit is easy, business owners overindulge, saddling their companies with debt they can’t handle.
So tell us what you think? Has the lending environment loosened up for small businesses?