Credit and Small Business

Meredith Whitney has been doing excellent work on the issue of credit during these tough economic times. And that continues with a piece in today’s Wall Street Journal titled “The Credit Crunch Continues.”

The entire piece warrants reading, but a few key points need to be highlighted here:

• “Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.”

• “ … small-business credit … has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.”

• “Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.”

• “Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled. According to the most recent Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels—the first contraction since 1993.”

• “The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.”

The last point is critical. Policymakers are working to take a bad situation, and make it far worse.

Whitney’s analysis is critical to keep in mind in terms of how the economy will be affected, given the importance of small business to economic growth, innovation and job creation. However, like most of us, she has not disentangled how much of the decline in credit is due to bank and/or regulatory policies, and how much is from small businesses themselves who have pulled back on capital and business plans given the state of the economy, and given looming tax and regulatory increases.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council