Jennifer Reynolds, AP
The National Federation of Independent Businesses released its Optimism Index for November on Tuesday. After going through it several times, I feel like it’s a mixed bag. Small business optimism is up slightly — basically, it’s up but nothing to write home about.
“The year is not ending on a high note in the small-business sector of the economy. The ‘bifurcation’ continues with the stock market hitting record high levels, but the small-business sector showing little growth beyond that driven by population growth,” said NFIB chief economist Bill Dunkelberg.
Ho-hum job growth is one of the highlights of the report. Yes, we’re doing better in that department than last year at this time, but I’m not sure that’s saying very much. The connection between job growth and access to capital is of interest to me, and I’m not sure the news in that department is any great shakes either. Only 32 percent of the NFIB members surveyed said they were getting the financing they needed — and I think it’s safe to assume that the NFIB probably represents the more established and mature of the almost 30 million small businesses in the United States.
Small business grows on borrowed capital.
Although I think 32 percent is bad, I regularly hear the number is more like 10 percent. Which is probably indicative of the state of younger, less established companies along with their more mature small business siblings.
Overall, small business lending remains down and most bankers and other financial pundits suggest the lack of demand can be traced to the creditworthiness of borrowers, increased regulatory scrutiny on banks and consolidation within the banking industry. Earlier this month, Rep. Sam Graves, chairman of the House Committee on Small Business, published a press release stating, among other things, that according to the Federal Deposit and Insurance Corporation, “ the number of banking institutions in the U.S. has fallen to its lowest level since at least the Great Depression, and many of the smallest banks have merged or closed.”
In a nutshell, bankers suggest, there are fewer banks, regulation makes it difficult to make comparatively risky small business loans and small business borrowers have bad credit. Although, I do believe these factors are part of the problem, I think it’s painting with a pretty broad brush.
After writing about this a few days ago, I’ve been asked, “What would you do about it?”
A good question. This morning I found in my inbox a piece written by Charles Green for the Coleman Report newsletter. For the most part, I think we pretty much agree. He lists a few more things than I do, but many of them can be put in similar categories.
The SBA needs to emphasize smaller loans: Green and I agree. In 2012, the average SBA 7(a) loan, its most popular and widely used loan product, was roughly $337,000. In 2013, it was almost $380,000. Most of the Main Street business owners you and I can relate to aren’t looking for loan amounts that look anything like that. At Lendio, 59 percent of the people who come to our site looking for a loan are asking for $50,000 or less. To the local dry cleaner or restaurant, that’s a lot of money. Most of the alternative lenders I speak with do much bigger loans, but they universally say their bread-and-butter small business loans are in the $25,000 to $50,000 range — often even $10,000 or $15,000.
Granted, the SBA loan guarantee program is not the biggest source of capital for small business owners, but they set a tone that trickles down to its member banks. This is also impacted by regulation, another area in which Green and I agree. As long as it costs relatively the same amount to underwrite a $50,000 loan as it does to underwrite a $500,000 loan, who can blame a banker who goes after the bigger fish?
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