How Small Business Credit has Changed Since the Great Recession

Bankers reported easing credit standards on small business in the second quarter of 2013, the April Federal Reserve Survey of Senior Loan Officers showed. But despite the recent lessening of lending standards, small business owners are still having a harder time getting credit now than before the Great Recession. In fact, virtually aspects of small business credit – the amount businesses borrow; where they source capital, and the terms of their loans – have changed since the financial crisis and Great Recession.

To begin with, small businesses are borrowing less than before the economic downturn. In the last three months of 2012, the inflation-adjusted value of commercial and industrial loans smaller than $1 million – a commonly used measure of small business loans – was 22 percent below April-to-June 2007 level, Federal Deposit Insurance Corporation data indicate. Moreover, the number of small loans declined 344,000 between the two periods, despite an additional 100,000 small businesses being in operation.

Fewer small businesses are looking for credit. In May of this year, 29 percent of the small business owners who belong to the National Federation of Independent Businesses (NFIB) said they borrowed at least once in the prior three months, as compared to 37 percent who indicated that they borrowed in April 2007.

The number of discouraged borrowers – small business owners who don’t apply for credit because they don’t think they will get it – has increased. According to data from the NFIB’s Annual Finance Survey and the Federal Reserve Survey of Consumer Finances, the percentage of small business owners who did not apply for credit because they didn’t think they would get it increased from 18 percent in 2003 to 29 percent in 2011.

Small business owners believe that obtaining credit has become more challenging. Thirty percent of the respondents to the second quarter 2013 Wells Fargo-Gallup Small Business Survey – which taps a representative sample of 600 owners of companies with up to $20 million per year in sales every three months – said that getting credit in the past year was difficult, up from 14 percent in the same period of 2007.

Small businesses aren’t as attractive to lenders as they used to be. According to a recent, only 48 percent of small business owners reported their cash flow as “good” in the first quarter of 2013. That’s significantly fewer than the 65 percent who said their cash flow was “good” in the second quarter of 2007.

Moreover, small business credit scores have fallen. In 2003, the Federal Reserve’s Survey of Small Business Finances showed that the average small business had a PAYDEX score of 53.4. In 2011 The NFIB Annual Finance survey showed that the average small company’ PAYDEX score was 44.7.

Bank lending standards have tightened. When the Federal Reserve asked bank Senior Loan Officers to describe their current loan standards last year “using the range between the tightest and easiest that lending standards at your bank have been between 2005 and the present,” 39 percent said that small firm loans are currently “tighter than the mid-point of the range,” while only 23 percent said they are easier.

Collateral requirements have increased. According to the Federal Reserve Survey of Terms of Business Lending, 84 percent of the value of loans under $100,000 and 76 percent of the value of loans of between $100,000 and $1 million were secured by collateral in 2007. In 2013, those numbers had risen to 90 percent and 80 percent, respectively.

Banks have become a less dominant source of financing for small businesses, as many large banks have pivoted out of the small business loan market. Between 2007 and 2012 the fraction of non-farm, non-residential, loans that were less than $1 million – a common proxy for small business lending – declined from 39 to 29 percent.

As always, obtaining credit is important to small business owners. However, the small business credit system has changed since the Great Recession. Fewer businesses are borrowing and the amount of credit has declined. Fewer banks are lending to small companies and those that are have become stricter about loan qualifications. The average small business has become less credit worthy. Collateral requirements have increased, and getting credit has become more difficult.


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

11 Reactions
  1. Interesting data, Scott.

    And, while the lending environment is starting to “feel” a little better that it did compared to the same time last year, the information that you provided in this post doesn’t support that feeling too well.

    The banks need to step-up. And, they need to realize just how important it is for them to support growing small businesses!

    The Franchise King®

  2. Out of adversity …
    The good news is that the crowdfunding industry is rising, and better suited than banks, IMHO, to support the micro and small business startups we need for net job growth.
    Crowdfunding ‘Bigger than the Internet’
    Crowdfunding on Fire
    Bank Lending Slips, Crowdfunding on the Rise

  3. Banks do not want to lend. More lending thru non-conventional methods are going to become more popular.

  4. Christina Memorio

    I agree, very interesting data, Scott. As many of the commenters before me have stated, banks just aren’t interested in financing most small businesses, leaving non-conventional lenders to fill the funding gap. Business financing providers like my company, Business Financial Services, focus more on cash flow and the overall health of the business, rather than credit scores. We’re able to not only take on the risk of funding these small businesses when tight lending standards preclude banks from doing so, but we’re also able to approve loans in as few as 5 days – much faster than the bank approval process. We’ve found that many small businesses don’t even try to get a bank loan these days, preferring the easy application and prompt access to short-term capital that non-traditional lenders are able to provide.

  5. In order for regulation and legislation to work in favor of small businesses, it becomes essential that accurate and complete information be available for analysis. Too often there are details not recognized in the information used by various agencies to help guide policy and action, and particularly in the world of privately held small business, the quality of data is often in question. This is where structured accounting software and the public accountant come in to play, and where a difference can be made not only with the individual client, but at a higher level by facilitating more accurate data production to support various research initiatives, such as those sponsored through the SBA and the Fed.

  6. “In fact, virtually aspects of small business credit – the amount businesses borrow; where they source capital, and the terms of their loans – have changed since the financial crisis and Great Recession.”

    Post Global Financial Crisis (GFC), something had to change.

    Globally, even here in New Zealand, large numbers of small business struggled, or even went out of business, as their cash flow reduced, and the traditional bank lending model for small businesses made it impossible for them to raise capital through bank loans.

    Peer to Peer lending is one of the models that emerged from the GFC that became an enabler for small/ medium business.

    Thanks for the statistics Scott, the article encapsulated the emerging models well.