The Credit Crunch Still Plagues Small Businesses

By Rohit Arora

This month, both the Small Business Administration (SBA) and Biz2Credit's Small Business Lending Index confirmed what entrepreneurs have known for quite a while: the credit crunch is still not over.

The SBA reported that bank lending to small businesses fell $15 billion in the first quarter of 2011 and that lending to startups and growing businesses has declined steadily during the last three quarters. The agency found that the total amount of small business loans outstanding in March of 2011 decreased 2.4 percent, or $14.9 billion, to $609.4 billion at the end of 2010.

In addition, the latest Biz2Credit Small Business Lending Index, an analysis of 1,000 loan applications on Biz2Credit during May 2011, found that approval rates for small business loan requests at smaller banks dropped slightly from 45 percent in the first quarter of 2011 to 44 percent in May.

Meanwhile, small business lending by big banks -- banks with $10 billion+ in assets -- again fell from 9.8 percent in the first quarter to 9.4 percentin May. The Biz2Credit Small Business Lending Index also identified the top 5 reasons why small business borrowers are not receiving funding:

1.    Revenue growth has dropped over last 2 months before the loan application was made
2. Smaller banks tightened with their underwriting norms after experiencing an uptick in defaults
3. Uncertainty in the overall economy - leading to lower spending by customers of small businesses4. Bank refusal to approve loans to companies in business for less than three years
5. Loan-making decisions are taking too long, which discourages entrepreneurs from applying

The Biz2Credit Small Business Lending Index loan request amounts ranged from $25,000 to $3 million. Applicants' average credit scores were above 680, and most firms' average time in business was just over 2 years.

Why is credit tightening?

Smaller lenders have gotten burned and now are becoming more cautious. It's a sign that there is still a lot of weakness in the economy. Apprehension about spending by consumers is hurting small business owners. Additionally, the stagnant housing market and fluctuating gas prices also drag down the economy as a whole.

The result is that banks are setting the bar higher for small business borrowers by asking for companies to be in business for three years and denying loans to companies whose revenue growth has slowed. Lending by big banks continues to decline, but we were somewhat surprised to see approvals by smaller lenders drop, as well.

Small business owners should not be discouraged, however. It is actually a good time for small business funding overall. The credit crunch has eased from its tightest period, and there is some balance. Lenders are being rightfully cautious -- particularly since defaults have risen in recent months. It is important for large and small lenders to make loans, but they must be prudent in their decision making.  

My advice to small business owners seeking capital is to make sure your documentation is well prepared.  Being organized and having a solid credit rating increases your chance of obtaining funding dramatically. Perhaps government can help, too, by creating tax breaks that benefit small business owners. Small businesses are the life blood of the U.S. economy. We must continue to support their growth.
 

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A frequently quoted expert on small business lending and recently named the Top Entrepreneur of 2011 by Crain's New York Business, Rohit Arora is CEO of Biz2Credit, which connects small business owners with 300 lenders, credit rating agencies and service providers. Since 2007, Biz2Credit has secured $400 million in funding for small businesses across the U.S. via its safe, efficient online platform.