Small business credit crunch continues, questions raised about standards

Jessica SarterSmall Business Lending

Small business lending is an exceptionally intricate facet of the U.S. economy, as many factors go into the decisions of lenders, federal agencies and more. In short, the components of disbursements, such as lending standards and small business loan volumes, are never black and white.

Small Business Trends recently reported that lending standards have been a particular concern of many small business advocates in recent months. Several reports, including those from the Federal Reserve and research firms, have shown that the lending standards of most financial institutions have eased substantially.

While many would take this as an excellent sign, believing that the availability of credit will be improved, the news provider cited a 2011 Federal Reserve Board of Governors paper that seemed to imply the opposite. According to the paper, written by current member Traci Mach and former member John Wolken, when lending standards are too easy, it could prove toxic for the better businesses.

Small Business Trends purported that access to credit is commonly the single most important facet of small business wellness, and as competition for credit has increased substantially in recent months, the standards by which financial institutions judge applicants need to be in the middle of the road.

In many ways, this prevents businesses that are more likely to use the loans unwisely from obtaining funding, while the funding from the same pot will have a better chance of landing in the hands of a more qualified borrower.

Regardless of whether or not standards are eased, reports have shown a substantial credit crunch affecting small businesses since late 2011. Reuters recently reported that one chief executive from the New York Stock Exchange, Duncan Niederauer, believes the clear issues regarding business loan accessibility are contracting the overall economy.

According to the news provider, Niederauer cited the results of a NYSE survey that questioned 285 small business owners, as well as several hundred CEOs from other companies around the globe, about their abilities to access funds in the recent past.

The survey revealed that 47 percent of respondents said their borrowing needs were either almost being met, or not at all, while just over a fifth of respondents said they had found adequate financing.

The NYSE official told Reuters that sentiments among small business owners have been waning in very troubling numbers. About 66 percent of respondents to the survey cited plans to either lay off current job holders or not employ any new workers. Reuters noted that Niederauer further called this portion of the economy the “job creation engine.”

Most experts believe that there needs to be a massive overhaul in the common ways lending standards and disbursement volumes are managed, especially by government entities like the Federal Reserve.

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