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Robert J. Sadowski |

Senior Economic Analyst

Robert J. Sadowski

Bob Sadowski is a senior economic analyst in the Research Department of the Federal Reserve Bank of Cleveland. His work focuses on monetary policy and regional economics.

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08.20.10

Economic Trends

Small Business Lending

Robert J. Sadowski

Although the U.S. economy stabilized in the middle of 2009 and is now expanding at a moderate pace, many small business owners who want to take advantage of growth opportunities report having difficulty obtaining credit for equipment purchases, operating capital, or committing to strategic acquisitions. From the perspective of the firm owner, bankers appear to be reluctant to lend regardless of credit history or ability to repay. In turn, bankers say that while lending standards remain tight, they have the capital and are anxious to lend, but demand is low. Bankers often cite as evidence the use of credit lines, which is well below historic norms.

Call Reports—one of the periodic reports all regulated financial institutions are required to file with their respective regulators (and officially named the Report of Condition and Income)—contain information that can be used to gauge the state of small business lending across the United States and in the Fourth District. One item institutions report is loans to small businesses and small farms. Examining those data shows that nationwide, total outstanding loan volume to small businesses declined 5.8 percent, or $37 billion, between June 2008 and March 2010, with the number of loans dropping by almost 14 percent. Looking at individual loan categories shows that those with original amounts between $100,000 and $250,000 declined the most in terms of outstanding volume (9.6 percent).

Nationally, community banks and large banks hold the highest shares of small business loans in terms of volume. (Banks are usually categorized by total asset value. Community banks have less than $1 billion; regional banks have $1 billion to $10 billion; large banks more than $10 billion; and mega banks more than $400 billion.) Community bankers reported that their small business loan portfolios dropped by 6.2 percent between 2008 and 2010, with loans under $100,000 posting the largest outstanding volume decline at 13.4 percent. This suggests that it may be microbusiness owners (under 10 employees) who are actually experiencing the most difficulty obtaining credit. Loans aimed at microbusinesses are typically in the range of $5,000 to $35,000. Small business lending at large banks declined by 4.2 percent during this same time period; however, loan volume with original amounts of less than $100,000 rose by 1.7 percent.

The pattern is similar for lending to all firms. Between June 2008 and March 2010, total outstanding commercial and industrial loan volume held by all banks nationally declined by 17.3 percent, or about $193 billion. While similar, these figures mean that, on a relative basis, small business lending has not declined as much as overall commercial and industrial lending.

The Federal Reserve Board’s Senior Loan Officer Survey is a useful tool for monitoring business loan supply and demand. According to the July 2010 survey results, about 4 percent of bankers, on net, said that loan demand by small firms was moderately weaker on a quarter-over-quarter basis. While the trend has been growing less negative during the past year, many business owners remain uncertain about the strength and sustainability of the economic recovery and are less inclined to borrow. Uncertainty is one of the primary reasons given by the majority of business owners we spoke with in the Fourth District for why they are not increasing current or near-term capital spending relative to actual spending during the past 12 months.

On the supply side, 9 percent of bankers, on net, said that credit standards for approving applications for commercial and industrial loans or credit lines have eased somewhat on a quarter-over-quarter basis. However, the improvement has been concentrated at large domestic banks. This means that tight credit standards remain firmly in place for the most part, and they are expected to be tighter than their long-run average level for the near term, especially for below-investment-grade firms.

Looking at call report data filed by Fourth District bankers, we found that it is more difficult to discern meaningful trends due to the many bank acquisitions and charter consolidations in recent years. Report data indicate that between June 2008 and March 2010, total outstanding loan volume to small businesses by all District banks rose 7.0 percent, or about $4 billion. However, a substantial amount of the increase can be attributed to one large District bank that consolidated two out-of-District bank charters under a single Ohio bank charter at the beginning of the fourth quarter 2009.

Fourth District community banks reported that lending to small firms has been on a downward trend since June 2006. In fact, between 2006 and 2010, outstanding volume declined by over $500 million, or about 6 percent. The under-$100,000 loan category showed the largest volume drop at 18.5 percent, with the number of loans in this category falling by more than 21 percent. One activity we have recently undertaken in the District is to discuss lending conditions with small business owners through meetings and Beige Book contacts. These interactions provide us with anecdotal evidence regarding access to credit by small firms. Information obtained from these interactions again points to the microbusiness owner as experiencing the greatest effect of tight credit standards. Many manufacturers reported that while they are encountering some difficulties in credit markets, their “very small“ suppliers and customers are experiencing far more difficulty obtaining a loan, or they are denied credit altogether.


There is little doubt as to the substantial pullback in lending to small businesses nationally and in the Fourth District. Anecdotal information suggests that until business owners are more confident in the sustainability of a robust economic recovery, credit demand will remain subdued. Even if demand does begin to pick up, the supply of credit may be more limited than before the recession. Many bankers do not anticipate any loosening of credit standards for the foreseeable future, and they tell us that current standards for loan applicants are the new norm.