Bernanke Urges Support for Small Businesses

Federal Reserve Chairman Ben Bernanke says small businesses are still struggling to secure loans.
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WASHINGTON (TheStreet) -- Federal Reserve Chairman Ben Bernanke on Monday said small businesses are having an increasingly hard time trying to secure bank loans, and stressed the economic importance of better supporting small firms in the future.

"Small businesses are central to creating jobs in our economy; they employ roughly one-half of all Americans and account for about 60 percent of gross job creation," Bernanke said at an event hosted by the central bank, "Addressing the Needs of Small Businesses," in Washington. "The formation and growth of small businesses depends critically on access to credit. Unfortunately, those businesses report that credit conditions remain very difficult."

The share of survey respondents who told the National Federation of Independent Business that credit conditions have tightened over the prior three months has "remained extremely elevated by historical standards," Bernanke added.

Bank loans to small businesses dropped from $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010, he said, citing data from the Federal Financial Institutions Examination Council. (The Small Business Administration defines small businesses as those with fewer than 500 employees.)

"An important but difficult-to-answer question is, 'How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?" Bernanke said. "No doubt all three factors have played a role. Clearly, though, to support the recovery, we need to find ways to ensure that creditworthy borrowers have access to needed loans."

While Bernanke's speech didn't mention any specific measures the Fed would take to alleviate the crunch, it highlighted the common themes that have come out of more than 40 small-business meetings that the Fed has held in the past five months.

"Business owners frequently noted that the declining value of real estate and other collateral securing their loans poses a particularly severe challenge," Bernanke said. "As one business owner at the Detroit meeting I attended put it, 'If you thought housing had declined in value, take a look at what equipment is worth.' "

Access to credit lines and working capital are the most critical financial needs among small-business owners, followed by the need for refinancing tools that would allow them to take advantage of historically low interest rates, he said. Many small businesses are resorting to borrowing through owners' personal credit cards or from retirement accounts.

Small-business owners also are expressing a need for "patient capital" from investors. That is, investors who are willing to commit funds for several years without expecting any immediate returns.

"The challenge ahead for lenders will be to determine how to assess the credit quality of businesses in an uncertain and difficult economic environment. It is in lenders' interest, after all, to lend to creditworthy borrowers; ultimately, that's how they earn their profits," Bernanke said. "Regulators, for their part, need to continue to work with lenders to help them do all that they prudently can to meet the needs of creditworthy small businesses."

-- Reported by Carmen Nobel in Boston.

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