Small-business lending is down

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As small-business lending declines, the Federal Reserve is urging banks and regulators to help small business get the loans they need to create jobs, according to The New York Times.

Small businesses—having fewer than 500 employees—employ half of all Americans and account for about 60 percent of gross job creation. Federal data indicate that lending to small businesses fell from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of this year.

Different parties give various reasons for the decline during the past two years. Many entrepreneurs say bank loan officers are overreacting to the bad loans during the previous economic expansion and increased scrutiny from regulators. Economists say weak economic fundamentals and poor financial conditions have decreased the desire for new lending. Banks argue it isn't so much that they have tightened credit as they have returned to more traditional underwriting standards after being too lax.

"How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?" says Fed Chairman Ben Bernanke. "No doubt all three factors have played a role."

Some entrepreneurs have had to borrow money on their personal credit cards or from their retirement accounts to stay afloat. A collapse in the value of real estate and other collateral used to secure loans also has been a challenge for small businesses.

The Fed held 43 meetings between Feb. 3 and June 30 regarding the financing needs of small businesses.

8/25/2010

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