Credit still tight on Main Street - NY Fed report

By Catherine Clifford, staff reporter

NEW YORK ( -- Small businesses are not getting access to the credit they need, and as a result, they are struggling to generate the jobs needed to lead the nation toward recovery.

"Small firms employ nearly half of all Americans, account for about 60 percent of gross job creation, and historically have created more jobs than larger firms at the start of economic recoveries," according to a report from the Federal Reserve Bank of New York released Monday. "Yet recent contractions in business borrowing may be limiting the capacity of small businesses to play this critical role."

More than three-quarters of small businesses that applied for a loan during the first half of 2010 received only "some" or "none" of the credit they desired, the report finds.

Of the 426 small business owners polled by the New York central bank between June and July of 2010, 59% applied for credit during the period. This suggests that there is still demand for credit among Main Street businesses -- despite many banks' claims that lending to small businesses is down because they haven't been asking for loans.

$40 billion in lending disappears: Since the start of the recession, loans to small businesses dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010, according to bank financial reports submitted to the government.

The Fed survey set out to find out what obstacles might be keeping loans from flowing by talking to Main Street business owners themselves. "We've only heard anecdotally about difficulties for regional small businesses in obtaining credit without any numbers to confirm this," said Kausar Hamdani, senior vice president and community affairs officer at the Federal Reserve Bank of New York.

Meanwhile, Federal Reserve Chairman Ben Bernanke said in a speech on Friday that there have been some "positive signs" in the credit conditions for small businesses. "In particular, banks are no longer tightening lending standards and terms and are reportedly becoming more proactive in seeking out creditworthy borrowers," he said.

Banks may no longer be tightening their lending standards, but that's not saying much since they didn't have much further to squeeze: For three and a half years straight, most banks said they were toughening their lending standards, according to a quarterly survey of senior bank loan officers by the U.S. Federal Reserve.

In April, the picture finally began to change: More banks are now loosening their lending standards to small firms than are tightening them.

Applicants not creditworthy: Banks also have been saying that lending to Main Street has been down because the small businesses applying for loans aren't creditworthy.

And indeed, the report from the New York Fed backs that up, finding "evidence of comparatively strong demand but weakened applicant quality and continued perceptions of restricted credit availability."

Small businesses that were successful in obtaining a loan had sales growth during the recession, were at least five years old, or were able to use previously saved profits to finance their businesses through the downturn, according to the survey. Surprisingly, having obtained a loan in 2008 didn't appear to help applicants land a loan in 2010, the report noted.

The discouraged: Unmet demand for small business loans could be even stronger than the numbers in this report state, since it only considers small businesses that actually applied for a loan in the first half of 2010.

More than four out of ten small businesses did not apply for a loan during that timeframe, and some of them may be so-called "discouraged" borrowers, according to the report, who "thought they would not qualify or the application process and paperwork would be too daunting." To top of page

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