SBA Office of Advocacy Report on Small Business Lending

November 21, 2012

Earlier this month, the U.S. Small Business Administration (SBA) Office of Advocacy (Advocacy) released a study titled: How Did the Financial Crisis Affect Small Business Lending in the United States? The study, authored by Rebel Cole of DePaul University in Chicago, Illinois, found that the decline in bank lending to small firms was much more severe than it was for their larger counterparts.

It should come as no surprise that small-business owners face unique challenges when trying to obtain financing. Almost half (43 percent) of small-business respondents to NSBA’s 2012 Access to Capital Survey said that they were unable to obtain adequate financing over the last four years. As a result, nearly a third (32 percent) said that they would be forced to reduce their workforce and a fifth (20 percent) said that they would have to reduce employee benefits. Even more troubling is that fact that nearly a third (29 percent) of small-business respondents saw their loans or lines of credit reduced with 1 in 10 having their loans or lines of credit called in early – 19 percent of whom were given less than 15 days.

As America’s small-business owners and entrepreneurs continue to suffer through a credit crunch, this study helps to highlight the stark contracts between small-business lending perceptions and practices, and the need to encourage and expand small business lending in this country.

According to Advocacy’s summary of the key findings:

  • The analysis showed a significant positive relation between a bank’s level of capitalization and business lending, especially lending to small business. In other words, the report supports the position that higher capital standards would improve the availability of credit to U.S. firms, and it refutes banking industry claims that higher capital standards would reduce business lending and hurt the economy.
  • The research showed a significant negative correlation between bank profitability and business lending. Unprofitable banks tended to increase their lending and their risk of exposure so as to exploit the subsidy from their deposit insurance.
  • [Cole] compared business lending by banks that received TARP funds (Troubled Asset Relief Program) and those that did not, and found that the decline in bank lending was far more severe to small businesses than to larger firms. For example, total commercial & industrial (C&I) lending declined by 18 percent for large firms versus 20 percent for small firms. Among banks participating in TARP, the decline was even greater; small C&I lending declined by 31 percent and only 10 percent at non-TARP banks over the 2008-2011 period.
  • Small business loans from banks receiving TARP funds grew more slowly than those from non-TARP banks (7.0 percent vs. 8.4 percent) and their allocation of assets to small-business loans actually decreased by 1.9 percent, while those of non-TARP banks increased by 1.9 percent.
  • Bank size had a significant negative effect on business lending. [As larger banks continued to restrict their small-business lending, smaller community banks and credit unions significantly increased their their efforts allowing many small businesses to obtain the financing they need to expand their companies and hire new employees. This new evidence suggests that reducing the size of the largest banks could possibly lead to more small-business lending.]

NSBA applauds the SBA Office of Advocacy and Rebel Cole for their work on this critical study, and looks forward to working with Congress to enact legislation to encourage and expand small-business lending. For updates or additional information on small business issues, please follow us on Twitter at @NSBAAdvocate or follow SBA’s Office of Advocacy at @ADVOCACYSBA.