July 13, 2010
Federal Reserve President, Ben Bernanke said in a conference held in Washington D.C., titled “Assessing the Financing Needs of Small Businesses”, that extending credit to small businesses is the key to recovery for the U.S. economy according.
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 (1). Newer small businesses, those less than two years old, are especially important: Over the past 20 years, these start-up enterprises accounted for roughly one- quarter of gross job creation even though they employed less than 10 percent of the workforce (2).
The formation and growth of small businesses depends critically on access to credit. Unfortunately, those businesses report that credit conditions remain very difficult. For example, the net percentage of survey respondents telling the National Federation of Independent Business that credit conditions have tightened over the prior three months has remained extremely elevated by historical standards (3). And one measure of banks loans to small businesses dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010 (4). An important but difficult-toanswer 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? No doubt all three factors have played a role (5). Clearly, though, to support the recovery, we need to find ways to ensure that creditworthy borrowers have access to needed loans.
Since the onset of the financial crisis, the Federal Reserve through the use of the Term Asset Backed Loan Facility, helped finance more than 850,000 small business loans. Despite this, more needs to be done in order get much needed capital to small businesses as “lenders should do all they can to meet the needs of creditworthy borrowers”. By helping small businesses, Bernanke stated is “good for the borrower, good for the lender, and good for the economy”.
Bernanke’s solution? There needs to be more collaboration among parties since small businesses, which can range from pizzerias to start-up technology firms, do not answer to “one-size-fits-all solutions”. Every small business is different and lenders should find ways to understand those differences before making their assessment. Hence solving credit issues can be answered through “collaboration, interactive discussion, and cooperative problem solving” between banks, regulators, and small business owners.
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. 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.
Read the Full Text, Part 1 & Part 2
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