Money for capital investment is the lifeblood that allows a small business to prosper, grow and perhaps create badly needed jobs. But the credit squeeze that began several years ago in the wake of the “great recession” has made it difficult for small business owners to include growth and expansion in their financial planning.
Unfortunately many banks that provide financial services to small business, especially the bigger banks that have accounted for a large volume of business lending in the past, seem unlikely to increase their lending activities in 2012. While the overall picture for small business credit in the coming years seems murky, some small business consultants see the more hope for improvement than any time in the last several years. Small business owners may just have to look to less conventional or less familiar sources of credit if they want to expand operations or upgrade equipment.
Earlier this month, Bank of America was the subject of unwanted attention from business news outlets after several small business owners reported that BofA was calling in their established lines of credit. A BofA spokesman responded to the report by saying that the bank was severing a small, select number of small business credit lines, not making across-the-board reductions. But the BofA actions would be consistent with a trend towards a continuation of heightened risk aversion among the bigger banks.
Even before the financial crisis, a Small Business Administration study found that a decade of bank consolidation had the effect of reducing the availability of credit to small business. Larger financial institutions with international dealings must focus more on global economic conditions, sometimes to the detriment of the local markets in which they do business. Today, those conditions continue to be especially shaky, as evidenced by Europe’s long, ongoing financial crisis.
Big banks also claim that increased capital requirements that federal regulators put in place following the financial meltdown of 2008 restricts the amount of lending they can do. Banks’ greater selectivity rules out extending credit to many businesses whose financial reporting of their last few years of operations merely reflects the overall economic downturn rather than problems specific to those particular companies.
Banks are understandably even more leery of funding new startup companies, and alternative sources of cash for startups may be hard to tap. For instance, the SBA reports that venture capital funding is down by 30 percent. For the near future, only the most impressive business plans are likely to get backing from traditional financial institutions. Small-scale entrepreneurs may need to look to their network of family and friends to invest in their ideas, or to explore the new worlds of “crowdfunding” or “social lending” to raise capital.
Many established small business owners report having better luck obtaining credit from more local sources such as community banks and credit unions. Such financial institutions are usually more responsive to local economic conditions, which are much more positive in some regions than in the country as a whole. A Wall Street Journal survey last year reported that approval rates for small business loans at these institutions were about five times higher than the rate of approval from big banks. Small, local financial institutions are often more willing to consider the specific financial circumstances of a local business seeking to borrow money, and to make exceptions where a bigger institution will not. Small businesses can also look to community development financial institutions (CDFIs) and microlenders as sources of capital.
Padgett Business Services has worked to understand the changing needs of small business owners since 1966. Padgett offers small business consulting services to help business owners make the decisions that are vitally important to the ongoing health of their enterprises. We also offer bookkeeping, business tax preparation and payroll services for small business, along with business financial software to keep your operation running smoothly and efficiently with less time and effort.