Small business lending is down, according to Federal Reserve Chairman Ben Bernanke, who urged banks to give loans to more creditworthy operations.
“Small businesses are central to creating jobs in our economy,” Bernanke said. “They employ roughly one-half of all Americans and account for about 60% of gross job creation.”
According to Bernanke, who held a press conference on the topic in Washington earlier this week, loans to small businesses have dropped from $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010. Bernanke said that, while there is weaker demand for funding due to business struggles caused by the economic downturn, many creditworthy borrowers are being denied loans by banks trying to make up for a period of too-lax standards.
“Though some lenders said they were emphasizing cash flow and relying less on collateral values in evaluating creditworthiness, it seems clear that some creditworthy businesses (including some whose collateral has lost value but whose cash flows remain strong) have had difficulty obtaining the credit they need to expand, and in some cases, even continue operating,” Bernanke said.
Bernanke’s findings were based on more than 40 meetings the Federal Reserve held with small-business owners, trade associations, lenders, bank supervisors, federal, state and local government officials and other applicable stakeholders.
During the conference, Bernanke spoke about the Federal Reserve’s Term Asset-Backed-Securities Loan Facility (TALF) program that was created in 2008 to support loans issued by the Small Business Association. According to Bernanke, more than 850,000 small-business loans have been financed through the TALF program, but more help is needed.
“Though we believe that our and others’ efforts are making a difference, we also know more must be done,” Bernanke said.
Earlier this month, the House of Representatives passed legislation to create a $30 billion fund to offer community banks incentives to loan money to small companies. The legislation, back by the Obama administration, is currently awaiting approval from the Senate.