Many small business owners will be happy to put 2013 behind them. It has been a year of uncertainty with many companies reluctant to pursue new ventures, purchase new equipment or hire new staff. With government shutdowns, disagreements on budgets and issues with Obamacare, it is perhaps unsurprising that many small businesses have been hunkering down, waiting for the economy situation to recover.
Unfortunately, many small businesses are crippled with debt and cannot obtain the finance to take advantage of new and profitable opportunities, and without access to credit, expansion is not possible. While the situation has certainly improved over the past 12 months, small business lending has not returned to pre-recession levels and banks are still cautious. There are now fewer banks – many have ceased trading or have merged with larger lenders – and the large lenders are turning down small companies due to a poor credit history. In spite of improvements in the economy, unsecured small business loans and vendor financing are still difficult to obtain.
With the current lending restrictions, many small businesses have turned to alternative vendor financing loans, non-traditional working capital loans and merchant cash advance options. The latter is a major growth area that has seen growth of 64% over the past four years. Until the lending environment fully recovers, these financing options provide a lifeline and are often the only choice for small businesses with bad credit histories.
This month the RICE subcommittee (House Small Business Subcommittee on Economic Growth, Tax and Capital Access) met to discuss the current lending environment and to assess small business loans and the various factors and economic trends affecting small businesses and lending institutions. With small businesses providing over two thirds of jobs in America, making sure loans are available is vital for continued economic recovery.
The subcommittee found there was an increase of 1.7 million small business loans under $1 million made in the second quarter of 2013 compared to the same period in 2011. In spite of an improved outlook for 2014, Chairman Rice pointed out that “Washington must pull back on the onslaught of financial regulations so that small businesses can access the credit they need to grow and create jobs.”
At face value the figures appears to spell good news for small businesses and indicate ongoing improvements in the lending market despite increased regulation. However, for many small businesses the easing of restrictions in lending is not happening nearly fast enough. While there have undoubtedly been improvements over the past 12 months there is still some way to go before pre-recession lending levels return.
The latest data compiled for the committee hearing suggests that more new small business loans are being issued loans by the banks, although the data may be misleading. There is some debate as to what constitutes a small business and of the twenty data sources used by the committee, each had its own definition of a small company”. Until there is some standard of classifying what constitutes a small business, it will be difficult to reach any reliable conclusions about lending levels.