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.