This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

What Really Spurs Small-Business Lending

Stocks in this article: JPM

CHICAGO ( TheStreet) -- One of the most stubbornly unchanging aspects of the current economic climate is the lackluster lending environment for small businesses. It's not for lack of trying: The federal government has increased funding for SBA-backed loans and major financial institutions such as Chase (JPM) have announced special initiatives to attract and support customers who own businesses.

But overall, there hasn't been much change in the number of loans granted to small businesses, which means they aren't expanding, they aren't growing and they aren't hiring.

According to the most recent Quarterly Lending Bulletin released by the Small Business Administration, small-business lending was flat from 2010 through 2012. The Federal Reserve Board's Senior Loan Officer Opinion Survey found that demand for loans from firms of all sizes had remained essentially unchanged throughout 2012, even though some domestic banks eased their lending standards to draw in more business.

A study commissioned by the SBA and written by DePaul University finance professor Rebel Cole, How Did the Financial Crisis Affect Small Business Lending in the United States?, provides ample evidence that small businesses were disproportionately affected by the crash, and that the effects of the crisis are still reverberating. Between June 2008 and June 2011, bank lending to all U.S. businesses fell by about 9%, but lending to small businesses fell by nearly 20% -- twice as much.

The study also examines whether the Troubled Assets Relief Program made a difference when it came to lending. In October 2008, the federal government began handing over billions of dollars to the nation's largest banks to stabilize them and encourage them to continue lending. Facilitating small-business loans was one of the program's explicitly stated goals.

Did it work? According to Cole's analysis, the answer is a resounding no.

Banks that got TARP funds saw a 30% drop in loans to small businesses between 2008 and 2011, versus a drop of only 10% at non-TARP banks. In addition, TARP banks allocated 2% fewer assets to small-business loans, while at non-TARP banks those assets increased by 2%. "In other words," Cole writes, "TARP banks took the taxpayers' money, but then cut back on lending by even more than banks not receiving taxpayer dollars."

Poring through lending data also revealed some interesting similarities between the banks that have maintained relatively higher rates of small-business loan approvals. For the most part, they tend to be younger and smaller than the financial conglomerates that got TARP funding. (Banks that are Too Big to Fail have also become Too Big to Lend, at least when it comes to small businesses and start-ups.) A recently established bank is more likely to be on the lookout for new clients, as well as more willing to take a risk on a fellow start-up in the same community. Easing regulations on the creation of banks might be one way to spur small-business lending in the future.

The study also found that well capitalized banks lend to small businesses at a higher rate overall. This has particular relevance given that capitalization has been a major issue in the government's overhaul of financial regulation. Financial industry lobbyists have protested that higher capital standards would hurt banks' ability to lend, and therefore stifle economic growth. Yet the SBA study shows that well-capitalized banks have continued to lend at higher rates throughout the crisis.

Ultimately, however, creating a favorable environment for small-business lending depends on more than just the banks. Because the reality right now is that few small businesses are even applying for loans. According to the most recent Small Business Optimism Index, a monthly survey released by the National Federation of Independent Business, only 1% of business owners said financing was their top business problem, one of the lowest readings in the survey's 27-year history.

Until the broader economic climate improves, the demand for small-business loans will remain weak. And that's bad news not only for start-ups, but for banks as well.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,719.00 +33.27 0.19%
S&P 500 2,052.75 +4.03 0.20%
NASDAQ 4,701.8670 +26.1550 0.56%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs