Despite the economy”™s recovery since the 2008 financial crisis, small businesses still have difficulty securing credit, according to a survey released by the Federal Reserve Bank of New York.
The annual Small Business Credit Survey, released Aug. 12, polled businesses in New York, New Jersey, Connecticut and Pennsylvania on their recent experiences in obtaining and utilizing credit. Survey results highlighted rising business costs, including the cost of financing and applying for credit.
Despite growth in the lending industry for loans amounting to $1 million or more, loans below that threshold remain at 2005 levels.
“It indicates that there”™s a lack of confidence in the minds of small-business owners,” said John Tolomer, CEO of The Westchester Bank. “They”™re still looking at expenses, and thus small businesses are borrowing less to buy new equipment and add new employees.”
Part of the reason could be that the cost of applying for credit and the cost of credit itself continues to grow. In the New York Fed”™s survey, 40 percent of companies reported increasing financing costs, and the number of firms being priced out of traditional credit markets rose 2 percentage points between 2012 and 2013. Of those firms seeking credit, 81 percent were looking for $500,000 or less.
“I think in general, loan demand has been soft, and that”™s the Fed”™s point with the survey results. It cuts to a lack of confidence,” Tolomer said. He noted that as a local bank, The Westchester Bank is positioned to understand the local small-business lending market.
One reason lending under $1 million might be stagnant is what Matthew Carey, director of the Center for Financial Market Studies at Iona College in New Rochelle, termed “technological disruption.”
“Banks tend to make it easier for larger companies to get credit, and often smaller companies don”™t have the track record or time to spend to apply for credit,” Carey said. “Kickstarter and crowdfunding are perhaps more effective for small businesses to find funding, rather than the traditional routes of bank loans, credit cards and personal savings.”
This technological disruption, Carey said, is something the Fed”™s survey doesn”™t take into account.
“Access to credit needs to be differentiated from access to bank loans,” Carey said. “When people talk about credit nowadays, it”™s important to talk about these new alternative sources of funding as well.”
Carey noted that eBay subsidiary PayPal has gotten into the small-business lending market with PayPal Working Capital, which lends money to small-business owners through their PayPal accounts, and then siphons a portion of revenue received through the accounts for repayment.
What”™s more troubling about the small-business lending market, Carey said, is when businesses cite the high cost of credit in a financial market that has become used to low interest rates. “People are used to it, and don”™t want to pay the spread, and banks don”™t want to make these loans that aren”™t as profitable,” he said.
That said, Carey noted that the latest Wells Fargo/Gallup Small Business Index, a survey that measures small business optimism, rose to its highest level since 2008, reaching positive 49. Despite this new high, the index remained well below prerecession levels, when it had a nearly four-year stretch topping positive 90 from 2004 through 2008.
The index is compiled from data gleaned each quarter from small businesses across the nation to gauge their perceptions of their present situations and future expectations in six key areas: financial situation, cash flow, revenues, capital spending allocation, hiring and credit availability.
Carey noted the rise in a survey polling consumer optimism is a good sign. “What this indicates is that we might be seeing the start of an improvement in small-business credit and lending.”
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