NFIB Research Update February 2010
America is counting on the job-creation power of small business to pull our economy up out of a recession and Washington continues to search for bi-partisan consensus on how to fuel entrepreneurial growth. NFIB's latest study, Small Business Credit in a Deep Recession, sheds light on small business credit conditions and how they are affecting the ability of smaller firms to contribute to the nation’s economic recovery. The research study's author, William J. Dennis, Jr., is featured in this interview.
Sullivan: The research report that you just released dives into the issue of small business access to credit What are the top findings from the report?
Dennis: The most important current economic problem for most small business owners is sales, not credit. In fact, even those who wanted credit and could not get it were twice as likely to cite sales as to cite credit when identifying their most pressing concerns. Also identified more frequently than credit as the most important problem was business uncertainty, uncertainty caused by the economic problems experienced and the turmoil in Washington. Depressed real estate values complicate issues further.
Poor sales and depressed real estate values yield shaky balance sheets for many. Add uncertainty to the relatively low number capable of and wanting to borrow for expansion, upgrades, etc., and the credit picture is not pretty. Many small business owners would like to get credit and cannot, though the study could not measure creditworthiness on a case by case basis.
Banks aren’t off the hook by any means. Small business customers of the very largest banks, those with assets of $100 billion or more and the ones that received most of the TARP money, obtain much less of the credit they want than small business customers of all other sized banks.
Bottom line – in 2009, 55 percent of small employers tried to obtain credit and 45 percent did not. Of those who tried, 40 percent obtained all they wanted, 10 percent most of what they wanted, 21 percent some of what they wanted, and 23 percent none of the credit they wanted. The remainder refused to make an evaluation.
Sullivan: Policymakers in Washington continually talk about the need to get capital to small businesses. Some people believe that this falsely inflates the importance of small business access to capital as a top priority issue. Those naysayers assert that demand for loans is actually pretty low. How does your research resolve this difference of opinion?
Dennis: Policymakers talk about capital because it is a problem they feel they can solve. You rarely hear them talk about marketing problems or human resource issues because they are low profile and there is no obvious solution. Giving people money is different. Policymakers can easily understand and do that.
Still, the study’s data show that the number of business owners attempting to borrow is stable. What seems to be happening is that attempts to borrow larger amounts for investing in the business are down for obvious reasons, perhaps also are the number of times a single owner tries. The current small business demand for capital frequently appears to be for cash flow and operating purposes. Many small business owners are having trouble on this score, particularly in their efforts to obtain or renew credit lines.
Sullivan: There is concern that small business has too much credit card debt. What information does your research provide to bolster or counter that concern?
Dennis: Yes, there is a problem here, but the issue is more subtle than the public typically understands. About four in five small business owners with a business credit card pay off their balances every month. That means the card(s) functions as a transaction-assist (convenience) rather than a source of credit. Fees and abrupt changes in conditions governing the card can be problematic for them, but they do not appear to be a big deal in the scheme of things. Matters are very different for the one in five who uses a card(s) for that purpose. Cards are a very expensive source of credit.
The study underscores a couple of well-known facts. Business credit cards are relatively easy to obtain. Lines of credit, the preferred credit source, are much more difficult. There was also a direct relationship between the D&B credit score (a measure of creditworthiness) and the ability to obtain a line, though no such relationship existed between a credit card and the D&B credit score. Obviously credit card issuers use different criteria.
Sullivan: You devote considerable space in the report to real estate issues. Are we just talking about the construction and real estate industries here or are there broader implications?
Dennis: The problem is much broader than construction and real estate, though those two industries have obviously been really stung by events of the last two years.
Small employers own considerable amounts of real estate. For example, 93 percent own a primary residence; 49 percent own their businesses premises, omitting home-based businesses; and, 39 percent have investment real estate that is neither of the other two. Twenty percent have a second mortgage on at least one piece of property and about 13 percent have at least one property that is upside down. The loss in value of this real estate over the last two or so years puts substantial pressure on balance sheets, making borrowing much more difficult whether an owner has a manufacturing, retailing, service or construction business.
The longer-term problem is that real estate values are not likely to climb very fast in the future. That means as sales begin to improve and small business owners really need to borrow for expansion, renovation, hiring, etc., real estate will be a drag on their ability to do so.
Sullivan: How does the current small business credit market differ from the past, say 5 or 10-years ago?
Dennis: Huge differences! From the beginning of financial services deregulation dating to the 1970s, small business owners have increasing found greater access to the credit markets and more competition for their banking business. By the mid-2000s, nearly 90 percent of small employers obtained their last credit request. Meanwhile, owners were bombarded by mail, phone calls, and in-person solicitations for their banking business. Now something quite different is occurring.
Someone recently asked me, how does the current period for small business access to credit compare to normal? Unfortunately, there is no normal. For 30 – 40 years, things grew increasingly more favorable for small business owners, perhaps too favorable. Last year (even beginning in 2008), there was a sharp turn in opposite direction. How much of this is recession and how much is systemic is a matter of conjecture.
Sullivan: NFIB research has provided a treasure trove of information on small business issues. Much of your research is catalogued on NFIB's web-site http://www.411sbfacts.com/. Are past surveys reinforced by the findings in this research?
Dennis: Many of our past studies provide context or comparisons for our current work. Some of it appears in the National Small Business Poll series, which is catalogued with Poll questions that can be sorted on 411. Other credit studies pre-date 411, most notably the Credit, Banks and Small Business series which first appeared in 1980.
Sullivan: Right now, Washington is focused on measures to spur job creation and growth in the small business sector. What advice does this research have for Congress and the White House.
Dennis: Some for present consideration and some for an evaluation of the past.
The primary message is that the country needs to stimulate sales and tackle real estate. Remember, we talked a lot about housing last year with minimal consequence. Now, there are commercial real estate problems. The worst of those are still to come. A huge Federal deficit exists, which if not soon brought under control, could result in credit “crowd-out” in the not so distant future. So, we need to get the fundamentals back in order.
In addition, the rules of borrowing and lending are in flux and being rewritten. No one, small business owners, bankers, or regulators, seem to have a common understanding of what creditworthy means and what collateral is worth. Time is probably the only thing that will stabilize conditions, though a healthy economy would certainly speed the process.
Public lending programs are not likely to help very much. They are simply too small, too complex, and have insufficient reach. Nor do they address the sales or real estate problems. But we have an idea or two at NFIB that will skirt these issues and hopefully will be more effective. Stay tuned.
Tom Sullivan served as the Chief Counsel for Advocacy at the U.S. Small Business Administration from 2002-2008.
