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Cascade: No. 71, Spring/Summer 2009

Spotlight on Research: Small Businesses' Access To Credit

The current economic morass is having a profound impact on all sectors of our economy. Some policy prescriptions for assisting the economic recovery have already been implemented, while others are under review. Whereas early efforts were concentrated primarily on the problems plaguing the financial system and “Wall Street,” attention is also being focused on the difficulties experienced on “Main Street.” One group that will be counted on to aid in the recovery is small businesses. Small business owners and entrepreneurs are credited with a significant portion of the net job creation that occurs in the U.S. However, their ability to provide jobs and help spur an economic recovery will be affected by their ability to obtain loans. The tightening of credit markets is thought to impede the efforts of small businesses. A report by William J. Dennis Jr. addresses this concern.1 What follows is a summary of his report.

Marvin M. Smith, Ph.D., Community Development Research AdvisorMarvin M. Smith, Ph.D., Community Development Research Advisor


The author points out that an unfortunate series of events — the collapse of several high-profile financial entities, a precipitous drop in real estate values, and the onset of a severe recession — has resulted in depressed demand for credit by small business owners. During a recession, a decrease in demand for credit is understandable, because it is likely that fewer opportunities for productive investments exist and poorer sales tend to weaken balance sheets — both of which affect the decision to seek additional capital. But the author also notes that the declining value of real estate has had an unappreciated effect on small business owners. Many of these owners have real estate investments, and the loss in value adversely affects their balance sheets, which in turn makes borrowing more tenuous.

However, according to the author, small business owners are not as “concerned about causes and complications as they are about impacts.” Thus, he observes that the “impact of a weak economy, falling real estate values, and tighter credit markets leaves them deeply concerned, to a point where many believe the survival of their enterprises are threatened.”

Data and Methodology

The author’s report is based on survey data collected for the National Federation of Independent Business Research Foundation by the Gallup Organization. A sample of 751 small employers from the files of Dun and Bradstreet were interviewed between October 22, 2008, and November 17, 2008.2 Since a majority (60 percent) of businesses in the U.S. employ from one to four people, a sampling strategy was used to ensure that an adequate number of businesses with more than 10 employees were interviewed.

The Nation’s Finance Problem

A slight majority (53 percent) of the small employers interviewed believe that the nation’s financial difficulties substantially affect their businesses. The degree of the effect varies, with 34 percent considering it significant, while 19 percent consider the impact to be a little less severe, regarding it as considerable. “Another 33 percent judge the impact as milder, while 13 percent do not think they have been affected.”

On a more disconcerting note, the survey revealed that 26 percent of the small employers who said they were adversely affected by the nation’s financial problems consider the impact “a threat to their firm’s survival, with another 16 percent assessing conditions as severe enough to depress prospects for the foreseeable future.” The author hastens to point out that the 26 percent figure might be misleading, since about 10 percent of small employers go out of business in a given year regardless of broader economic circumstances. But he also notes that there remains a sizable difference between 26 percent and 10 percent, which reflects the extent of the concern with the current economic fallout. Moreover, this concern is widespread and not confined to firms of any specific demographic group.

Impact on Small Businesses

The small employers revealed that the economic situation has affected their businesses in several ways. Forty-five percent cited slowing or lost sales as the primary problem. Other impacts include the unpredictability of business conditions (23 percent), falling real estate values (9 percent), the inability to obtain credit (9 percent), followed by the cost and terms of credit (5 percent). Yet 4 percent indicated no difficulties stemming from the current economic circumstances. When survey participants were asked to predict the most serious long-term outcome of current conditions, the most frequent response was a long period of slow or no growth.3

Borrowing Sources

The author points out that “small business owners have somewhat over one trillion dollars outstanding in debt from financial institutions.” The owners report various sources for their borrowing.

Vendor Financing. The survey shows that, since September 1, 2008, very few small employers (6 percent) used a vendor to finance a business vehicle or equipment, even though this was the most accessible form of credit examined; 22 percent who tried were unsuccessful. The author suggests that the “limited demand results from the shortage of business investment opportunities that are typical during an economic downturn.”

Loans from Financial Institutions. The author reports that fewer than half (44 percent) of the small employers have one or more business loans from financial institutions — not including lending from lines of credit or credit cards. But only 5 percent had their lender demand changes in the loan terms. However, of the 13 percent of owners who sought a loan in the period since September 1, 52 percent were rejected.

Lines of Credit. Although lines of credit are an important source of financing, only 9 percent of small businesses had applied for a new line since September 1, 2008. But employers did report changes to existing credit lines. The most common changes were an interest rate increase (27 percent) and a reduction in the line amount (18 percent).4

Access to Credit

The author observed that roughly half of the small employers who applied for the preceding types of credit were successful. He used regression analysis to identify key factors associated with obtaining (or not) the credit small employers desire. The five most prevalent variables and their association (“more likely” or “less likely”) with the businesses acquiring additional credit are:

  • Growth in sales over the last two years (more likely)
  • The more “upside-down” properties held (less likely)5
  • The fewer number of mortgages used to finance the business (more likely)
  • Firms with a positive self-evaluation of comparative business performance (more likely)
  • The more years of operation (more likely)

Closing Comments

The author points out that the overriding problem for small business is the poor economy compounded by the fall in real estate values. The latter is significant, since 96 percent of small employers own their personal residence, and the data show that the major credit issue is the “direct and indirect use of personal residences to procure business assets and its consequences when business conditions deteriorate and real estate values fall.” The author suggests that any prospective loans to small business should be heavily subsidized to help those most in need.

  • 1 William J. Dennis, Jr., “Access to Credit,” National Federation of Independent Business’ National Small Business Poll, 8:7 (2008).
  • 2 In this report, a “small employer” is defined as “a business owner employing no fewer than one individual in addition to the owner(s) and no more than 249.
  • 3 A majority (59 percent) of the small employers reported their opposition to the federal bail-out bill. However, “the survey did not determine if their response is preference for an alternative strategy, belief the shock of substantial portions of the financial system failing would have a salutary effect, or just plain venting.”
  • 4 The impact of the changes was mixed: “Thirty-two (32) percent of small employers experiencing them report the changes had no impact, while 24 percent suggest they were more irritating than harmful.” Only 11 percent of those affected indicate they were very harmful.
  • 5 An “upside-down” property is one where the size of the mortgage is greater than the market value.