Small business lending is down? Tell me something I didn't know

Published: Friday, Aug. 23 2013 8:55 a.m. MDT

Earlier this month, the Federal Reserve Bank of Cleveland released a study regarding why small business lending isn't what it used to be.


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Earlier this month, the Federal Reserve Bank of Cleveland released a study regarding why small business lending isn’t what it used to be. “Small business lending has dropped substantially since the Great Recession,” writes Ann Marie Wiersch and Scott Shane. “While some measures of small business lending are now above their lowest level since the economic downturn began, they remain far below their levels before it ….”

I don’t think there’s any question that small business is collectively the driving force of job growth in the U.S. — which is why everyone should be paying attention to this type of economic news. But the definitions the government uses to describe just exactly what is a small business are pretty complicated and don’t answer questions about just where in the small business continuum those jobs are created — but outgoing SBA Administrator Karen Mills does.

You might be surprised to know that it’s the barbershop down the street and the dry cleaner on the next block (and other businesses like them) that are the biggest job creators. Although politicians like to talk about how important small business is, they are always too willing to give tax breaks or other concessions to potentially big employers. They’re missing the point of who really creates the most jobs.

Mills suggests the type of business you and I identify with as small business are the real job creators, “approximately 4.5 million are Main Street businesses. These are the dry cleaners, mechanics, and medical clinics that form the fabric of our communities. Main Street businesses make up nearly 70 percent of the jobs in our country ….”

She also points out sole proprietorships, the vast majority of small businesses in our country, are responsible for 23 million jobs.

If the smallest small businesses are really the biggest job creators, I’m concerned that the current trend in small business lending is not going to support long-term job growth.

Not long ago the National Small Business Association (NSBA) released its 2013 Mid-Year Economic Report, which suggests, “Today, just two-thirds of small businesses (65 percent) report they are able to obtain adequate financing, down from 73 percent six months ago.”

Forty percent of NSBA survey respondents have less than five employees and 66 percent report 19 employees or less — the type of businesses Mills suggests are our nation’s job creation machine. The report authors suggest, “Small business plays a huge roll in economic growth, specifically when it comes to hiring. Unfortunately, just 18 percent report increasing their employee size, while 26 percent report decreases in employee size, resulting in negative net employee growth.”

This seems to support what is coming out of the Federal Reserve Bank of Cleveland, but there is a lot of finger-pointing as to where the problem lies. The report identifies three primary reasons lending is down and one revelation I don’t think anyone expected:

1. Demand is down: “Bankers say that the main reason small business lending is lower than before the Great Recession is that demand has fallen. Small business owners, they argue, aren’t expanding, depressing the amount that the small business sector needs to borrow.”

Small businesses were hit pretty hard during the recession and the report authors suggest, “typical self-employed household income saw a 17 percent drop in real earnings [between 2007 and 2010].” What’s more, the pounding small business owners have taken in the last few years has probably caused a drop in confidence among business owners' willingness to stick their neck on the line with the bank. And the next two reasons for the decline probably shed the most light on why they might lack that confidence.

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