Industry Market Trends

Taking Credit: Small Business Lending on the Mend

Jan 29, 2013

It's becoming easier for small businesses to gain access to loans from financial institutions, which suggests that now might be a good time for owners to consider investing in and expanding their companies.

Your business might not actually need to borrow money to expand, but the fact that access to credit is opening up indicates a more favorable business environment for smaller firms. The time may be right to launch a new product, add capacity, increase advertising, or enter a new market (as long as you've done the market research, prepared financial projections, and conducted sound business planning). More importantly, missing the chance to obtain financing could mean your competition is getting the jump on you.

The Thomson Reuters/PayNet Small Business Lending Index increased from 96.4 in September 2012 to 107.5 in December. That might seem like a modest jump, but index levels now are a far cry from a low of 65 in 2009. PayNet collects loan information from 250 lenders across the United States. Bill Phelan, founder of PayNet, explained that small firms "are seeing some profit-producing opportunities, and are wading in. The odds have shifted toward some optimism for [2013]." Indicators show that overdue accounts and delinquencies are down.

Registering similar results, the Biz2Credit Small Business Lending Index found that loan approval rates by big banks to small businesses increased from 13 percent in November 2012 to 14.9 percent in December. Biz2Credit generates its index through a monthly analysis of 1,000 loan applications. The 14.9 percent approval rate represents a large increase over the 9.7 percent figure in December 2011.

"When we look at how difficult it was to secure capital from large banks a year ago, we can see just how much the lending landscape has improved during all of 2012," Rohit Arora, CEO of Biz2Credit, said.

Approvals at small banks have increased as well. However, approvals from credit unions have dropped for seven consecutive months. "Many credit unions have not modernized their procedures and still request small business owners to come into their offices and become members before considering loan requests," Arora explained. "Traditional banks are better at automating the lending process and are showing that they are more willing to make small business loans than they were 12 months ago."

These results are somewhat contradicted by the Federal Reserve Board's January 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices. The report finds that the vast majority of banks (94.3 percent), both small and large, left standards unchanged for loan approvals to smaller firms (those with annual sales of $50 million or less) over the past three months. However, only 1.9 percent of banks said standards have eased somewhat, whereas 3.8 percent said they have tightened.

Research suggests that businesses that act on expansion opportunities amid a tough economic climate generally perform better in the long run. For example, according to Knowledge@Wharton, "those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered."

In fact, companies that advertised aggressively during the 1980s recession posted sales that were 256 percent higher than those that cut their advertising budgets.

In other words, a sluggish economy is not a good reason to hold off on expansion or investment plans. Companies also shouldn't wait to see what government and big business are going to do. Instead, a challenging economic period should be a time to launch new efforts, innovate, try new things, and make bold efforts to increase your market share.

Whether credit is easy or difficult to obtain, small businesses that take risks have much to gain. As Richard Branson, who expanded his Virgin Records business during the recession of the 1970s, wrote in the Telegraph last year, "People often blame economic conditions or the lack of finance from the banks as the key reasons for the failure of small businesses. Sure, banks need to keep credit flowing and governments need to hold down the bureaucracy and red tape, but entrepreneurs also need to take responsibility and keep driving their businesses on."