Financing for small business in a sluggish economy versus conflicting impulses of the entrepreneur.

Author:Geho, Patrick R.


Small businesses continue to face challenging times as the nation's economy struggles to improve. Even so optimism among small business owners is on the rise. More than half (56%, up from 48% last fall) have a positive outlook on business prospects over the next six months. In spite of the promising outlook, these signs of recovery do not translate into immediate plans for growth. The top priority of small business owners at this time is maintaining their current business and sources of revenue (31%) followed closely by growing their business (29%, down from 37% last spring) (The American Express OPEN[R] Small Business Monitor, 2012). The flat economy, reduced business equity values and the resulting impact to credit and collateral has made capital formation for small businesses through bank financing difficult to obtain. During this time of economic uncertainty many small businesses that would meet bank lending criteria and could use the additional capital chose not add additional debt to their balance sheet. Those entrepreneurs believe they have few options for their business and are just trying to maintain the status quo.


In order to determine if access to capital was the predominant issue for small businesses during this current weak economy, Middle Tennessee State University's Tennessee Small Business Development Center (TSBDC) and Center for Organizational and Human Resource Effectiveness (COHRE) conducted a phone survey of small business in the state of Tennessee. The survey was developed to investigate which Tennessee small businesses are obtaining business financing, what differences exist between Tennessee small businesses that receive financing and are denied financing, and which banks are lending to small businesses in Tennessee.


To conduct the survey, COHRE obtained a list of business contacts from Info USA. The contact list was restricted to small businesses operating in the state of Tennessee, which TSBDC defined as businesses with less than 500 employees that earned annual revenue of less than $10 million. The TSBDC and COHRE developed a 40-question survey, which inquired about a business's financing over the previous twelve months. The survey was developed using queries posed by TSBDC and questions from the U.S. Small Business Administration's (SBA) 2003 Survey of Small Business Finance. The survey was piloted on a select few small business owners known to COHRE employees.

Over the course of the survey development and administration, five phone survey administrators were hired and received identical training on survey administration, small businesses and the history of TSBDC. While conducting the survey, phone survey administrators followed a branching script adapted from the script used in the SBA's 2003 Survey of Small Business Finance.


Of the businesses contacted, 89 chose to participate in TSBDC's small business finance survey. Of these 89 participating businesses, only 14 businesses indicated they had applied for loans in the twelve months prior to being surveyed, and of these 14 loan applicants, 11 businesses were granted loans by 11 different banks. Business pessimism is driving borrowing decisions. In fact, 60% of the respondents indicated they did not want to apply for financing which is similar to the 56% of respondents in the American Express OPEN[R] Small Business Monitor (2012) survey who have no immediate plans for growth. Businesses are taking a wait and see approach due stricter bank lending criteria coupled with the poor economy in general.


Reduced bank lending coupled with small business loan defaults sets the stage for tightened lending standards. As a result, small businesses have found it difficult to secure loans. At the same time, many bankers have reported weak demand from qualified small business borrowers. Businesses with weak sales or poor prospects are more likely to cut back rather than expand their business, thereby reducing demand for credit (Wilkinson & Christensson, 2011). A National Federation of Independent Business (NFIB) survey showed that "weak sales" is the biggest concern for 27% of small business respondents, while only 3% of respondents report financing as the biggest problem (National Federation of Independent Business, 2011). A broad lack of confidence in the economy has borrowers backing away from new debt (Thomson Reuters PayNet Small Business Lending Index 2012). According to the PayNet study lending to small businesses has recently slowed:

The data definitively shows that demand for credit remains weak. This finding proves that business owners remain cautious about the economic recovery so much so, that they are forgoing expansion and hunkering down by placing more cash in the bank, rather than expanding property, plant and equipment.

Application levels show that demand for credit remains tepid:

* Credit applications peaked in October 2008, when they rose to all-time highs.

* During the recession, applications fell 30% by January 2010.

* Applications for credit remain weak, at about the same level as during the recession.

Market share by lender type shows competition heating up for the little credit demand that exists:

* Bank market share of lending grew most during 2007-2009.

* In 2010 the captive finance companies started to get more aggressive and took a bigger share of the pie as new originations grew 5% overall in 2009-2010 but shrank 2% for banks.

* Now independent finance companies are stealing market share from banks as their originations grew 39% in 2011 while the overall growth was only 17%.

* "With 2012 business defaults projected to be lower than at any time since 2006, lenders are responding with easier credit terms to reflect this lower risk. The conundrum is that with risk and interest rates this low, small business is still cautious about taking on more credit" (Phelan, 2012).

According to the NFIB--Quarterly Survey, 1 in 4 business owners viewed the current economy as a bad time to expand with 60% indicating that political uncertainty being the main reason, second only to business concerns about the weak economy. Investing in jobs or plant and equipment will remain at maintenance levels until this is resolved. The survey shows that companies aren't confident enough to take on debt or new employees (NFIB, 2012).

The Federal Reserve Bank (FRB) of Atlanta conducts surveys of small business contacts in the Southeast to get their perspective on general business and credit conditions. According to their most recent survey of 293 small businesses, 110 applied for credit, leaving 183 firms who chose not to apply for credit. The study does not explain why these firms did not apply for credit but it can be reasoned that economic uncertainty was a contributing factor as much or more than credit worthiness (Federal Reserve Bank of Atlanta Small Business Survey, 2011).

Applying firms submitted three applications on average, and 37% had their overall financing needs met in full. A further 21% indicated they received most of the amount requested. In total of the 110 firms who applied for bank financing, 58% received funding at...

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