Small Business Credit and the Fog of Uncertainty

By at 12 June, 2013, 9:15 am

by Raymond J. Keating-

As the economy struggles to ramp up on the growth and jobs fronts, it pays to remember that this very much is a small business economy, and that smaller firms provide the bulk of new jobs.

One important indicator, therefore, to keep an eye on is the state of small business lending. That is, are businesses looking to and able to borrow funds that hopefully lead to expansion?

A couple of recent reports are worth noting to get a feel for the state of small business credit:

• The Thomson Reuters/PayNet Small Business Lending Index measures the volume of financing to small businesses, and it was up in April. That was the first gain since December. According to a June 3 Reuters report, PayNet president, Bill Phelan, had some interesting things to say about the Fed’s loose monetary policy and its effect, or lack thereof, on small businesses. It was reported, “The Fed is buying $85 billion in Treasuries and mortgage-backed securities each month in an effort to boost growth and jobs, but so far that stimulus has done little for small businesses, PayNet president Bill Phelan said in an interview. Small businesses ‘are not heading for the exits, but they are not firing up yet either,’ Phelan said… ‘There’s a lot of money being pumped in, but these businesses aren’t biting,’ Phelan said, adding that when small businesses do not borrow, they are not as apt to hire.”

• A June 11 report  in the Richmond Times-Dispatch offered some bits of information from the banking world. For example, Mark Vitner, senior economist for Wells Fargo, noted that small business lending “just pales in comparison to what we’ve seen in previous recoveries.”

It also was noted, “On a national level, corporate and small-business loans have been rising since the recession, but not as robustly as lenders would like… The American Bankers Association’s chief economist recently wrote that while business loans have increased for 11 quarters in a row, the pace has slowed. For banks, increasing their revenue ‘continues to be a struggle as businesses delay borrowing because of concern about rising health care costs, tax increases and the pace of our economic recovery,’ James Chessen wrote. ‘Until the fog of uncertainty dissipates, rapid loan growth is unrealistic.’ Lines of credit are going untouched, too. Wells Fargo CEO John Stumpf, speaking at a conference in New York two weeks ago, said use of credit lines is at a 30-year low.”

On the lenders side, increased regulatory requirements, costs and uncertainty are in play, and present serious challenges. But as is clear from these and other reports, the demand for loans among smaller firms is, to be generous, less than hearty. That, too, goes back to costs and uncertainties swirling around government policies – from tax, regulatory and spending policies to what the Federal Reserve is doing with monetary policy. The fog of uncertainty remains thick, to the detriment of small business confidence and the state of our economy.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating has written two new books titled Root of All Evil? A Pastor Stephen Grant Novel, and An Advent for Religious Liberty: A Pastor Stephen Grant Novel.


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