Debate has waged over why so many small businesses aren't borrowing. While some analysts, particularly those sponsored by large banks, maintain that demand is weak, small business advocates contend that banks have tightened their lending standards. But there's another reason why many entrepreneurs have held off borrowing, and it has to do with complexity.
Small business owners, almost by definition, have limited resources, and large banks have traditionally forced entrepreneurs to jump through hoop after hoop in applying for a line of credit. The process is such that many small business owners would prefer to skip it altogether.
The National Federation of Independent Business reported in its most recent Small Business Optimism Index that a net 8 percent of business owners reported loans were "harder to get" (compared to their last attempt) in February, unchanged from the month before.
"[The credit market] won't improve until loan demand improves and loan demand is still down," Bruce Spitzer, spokesman for the Massachusetts Bankers Association, told the Boston Herald. "Until small businesses are more comfortable with borrowing, these numbers are not going to jump exponentially."
But according to some analysts, such as Federal Reserve Governor Elizabeth Duke, the reality is not that business owners lack demand for credit – they're merely discouraged.
"Many small business owners were so convinced that their requests would be denied that they did not even apply for credit," Duke said at a Fed conference last year. "Despite this restricted credit availability, small business owners, by a large margin, still considered their most significant problem to be weak sales."
To others, this confusion over the state of the credit market may actually be a good thing. For example, new lending marketplaces like BoeFly provide entrepreneurs with a more simple way to find and research lenders.
"The lack of agreement that small business access to financing got worse in the past year means that the situation is improving," says Scott Shane for Small Business Trends. "Before the recovery started everyone agreed that small business access to credit had deteriorated."