The Federal Reserve Chairman, Ben S. Bernanke, expressed his solidarity for the Nation’s small businesses and urged banks and financial regulators to grant them loans for their success. Small businesses are responsible for 60% of job creation and employ almost half of all Americans. But the lending to small businesses show a decline in the last two years. Bernanke expressed his concerns and acknowledged the uncertainty in a daylong forum at the Fed’s headquarters.
Federal data reveals that lending fell below $670 billion in this year’s first quarter, a huge collapse, compared to $710 billion granted in second quarter of 2008. “How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?” Mr. Bernanke asked. “No doubt all three factors have played a role.”
A fall in the value of collateral and real estates that are used to secure loans is one reason for the decline. Borrowing based on personal credit cards and retirement accounts also posed problems. Even for businesses with strong cash flows but with depreciated value of collateral, obtaining credit for their expansion has become increasingly difficult.
Banks say that meritorious borrowers are granted loans and economists too agree that there is no evidence of refusal to lend. It’s only that banks have resorted to traditional underwriting standards after being too lax. Economists also argue that battered balance sheets and weak economic fundamentals have lowered new lending.
“Credit’s not an issue, Customers are the issue”, said William C. Dunkelberg, economist at Temple University. He reiterated that companies are still cutting on inventory and capital spending is at a 35 year low. But, Kevin P. Watters, chief executive at JP Morgan Chase, said banks are considering borrowers who were initially denied loans.
Citing new research, Bernanke said that in the last 20 years it has been seen that companies less than two old have generated a quarter of gross jobs in America which is certainly a reason to continue lending to small businesses in this recession.
This article was submitted by Rohit Arora, co-founder of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to