Small Business Borrowings Continue To Decline, Outlook Not Bright

A recession-generated decline in small business loan activity continues with the latest Small Business Administration (SBA) detailing a significant reduction in loans under $100,000.

The reasons that small business leaders are not adding to their loan portfolio range from slow sales to distrust of the economy to difficulties in obtaining credit.

Regardless of the reasons, the numbers are grim and growing grimmer.

Banks held $624.3 billion in small-business loans, which the SBA defines as $1 million or less, at the start of this year. That amount fell to $609.4 billion in March, according to the SBA Office of Advocacy, which issues the quarterly lending bulletin. That trend is troubling, according to Victoria Williams, an SBA economist who wrote the study.

"We see in small-business lending that they're left behind and slow to catch up," said Williams.

Specifically, the micro-business loans, those under $100,000, dropped the most, 2.9 percent, compared with a drop of 2.2 percent for loans between $100,000 and $1 million. Those levels suggest small-business owners are not confident the economy is improving.

Experts are divided on the primary reasons for the downturn but surveys by Information Strategies, Inc, indicates that lending policies are still very tight from most financial institutions.

Middle market companies are turning to private hedge funds for loans but smaller companies are not able to tap this lending source.

Relying on banks brings into play stricter requirements.  Small businesses report difficulties in obtaining loans.

The Biz2Credit Small Business Lending Index, an analysis of 1,000 loan applications on Biz2Credit ( during the month of May 2011 has found that approval rates for small business loan requests at smaller banks dropped slightly from 45% in the in first quarter of 2011 to 44% in May.

The Biz2Credit Small Business Lending Index identified the Top 5 reasons why small business borrowers have not received funding:

  1. Revenue growth has dropped over last 2 months before the loan application was made (last quarter to 2010 until Feb 2011).
  2. Smaller banks tightened with their underwriting norms after experiencing an uptick in defaults
  3. Uncertainty in the overall economy – leading to lower spending by customers of small businesses
  4. Bank refusal to approve loans to companies in business for less than three years
  5. Loan-making decisions are taking too long, which discourages entrepreneurs from applying.