According to the U.S. Chamber of Commerce all Nevadans should be mightily pleased that small business lending is a nice feature of the Nevada economy. If we look no further than superficial statements, the prospects do, indeed, look rosy in southern Nevada as of last March:
“Contrary to public perception, banks want to lend,” said Bruce Ford, senior vice president of City National Bank. “When they say banks aren’t lending, that’s not accurate.” Still, loans still have not reached pre-recession levels, said Bill Uffelman, president and CEO of the Nevada Bankers Association. The SBA, which plays a role in most business loans, last year issued $175 million in loans statewide. That’s up from $167 million in 2011 and $103 million in 2010. But it falls far short of the $277 million the SBA lent in Nevada in 2007.” [VegasInc]
Here’s why the level of small business lending isn’t a particularly good index of what’s happening in the overall economy. When attempting to present the case that Factor A is a crucial element in Outcome B, it’s preferable not to have too many variables.
There’s a hint concerning the Variable Problem in the statement from the VP of City National Bank — they have money to lend, but they aren’t making loans. Therefore, we can’t merely assume that the banks “aren’t lending” or are somehow being recalcitrant about opening the vaults to small business owners. There’s a second crucial factor in play: Banks can’t make loans to people who don’t want them.
What’s Out There?
The most common small business loan is the SBA backed 7 (a) program. These loans, made by local banks, can be used for long term working capital applied towards operational expenses, accounts payable, purchasing inventory. They can also be used for short term capital needs like seasonal financing, contract performance. Then there’s the money available for equipment, land, real estate, new buildings, and for the establishment of new enterprises. [SBA]
Here’s the point at which the wickets get sticky — what do we make of the figures on SBA 7 (a) lending program?
FY 2007 99,606 loans approved totaling $14.3 billion.
FY 2008 69,434 loans approved totaling $12.7 billion.
FY 2009 41,289 loans approved totaling $9.2 billion.
FY 2010 47,002 loans approved totaling $12.4 billion.
FY 2011 53,706 loans approved totaling $19.6 billion.
FY 2012 44,377 loans approved totaling $15.2 billion.
If we look at the amount of approved borrowing under the SBA 7 (a) program then have we seen an increase in Business Lending? Or, if we look at the number of loans approved do we see a decline in Business Lending between FY 2007 and FY 2012? Was there more Business Lending in FY 2011 when the total amount approved was the highest between 2007 and 2012, or does the reduction in the number of loans between 2007 and 2011 from 99,606 to 53,706 mean there was less Business Lending?
The SBA can analyze theses numbers and offer generalizations, but still not answer the question of what constitutes more, or less, Business Lending:
“The SBA attributed the decreased number and amount of 7(a) loans approved in FY2008 and FY2009 to a reduction in the demand for small business loans resulting from the economic uncertainty of the recession (December 2007 – June 2009) and to tightened loan standards imposed by lenders concerned about the possibility of higher loan default rates resulting from the economic slowdown. The SBA attributed the increased number of loans approved in FY2010 and FY2011 to legislation that provided funding to temporarily reduce the 7(a) program’s loan fees and temporarily increase the 7(a) program’s loan guaranty percentage to 90% for all standard 7(a) loans from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000.” [SBA pdf]
Just to make matters a bit more complicated not all approved loans are actually disbursed. The number of loans approved can range from 10% to 20% higher than the number of loans for which funds are disbursed. Some owners decide not to finalize the loans, sometimes there is a change of ownership and the loan is dropped. [SBS pdf]
If this isn’t complicated enough, we can add another variable to the mixture — politics. The Obama Administration has argued for additional lending under the SBA 7 (a) and 504 loan programs, while critics of the Administration have asserted that tax reductions, easing of regulations on the financial sector, and a reduction in overall federal spending are the best ways to improve small business growth.
In short, we can see what moves the needle in terms of SBA lending programs, but it is far more difficult to determine if this means that there is more or less Business Lending. It’s even more difficult to make qualitative statements that because there is “more” business lending in a particular state or region if this means there is more economic growth.
A 2008 Urban Institute study (pdf) found that 34% of SBA loans were purposed for purchasing or installing new equipment; 23% were allocated to loans for finance working capital; 21% were used for acquiring a new business; and, 6% of the loans were to support new hiring.
Micros and Macros
Since this has already become a snarl of complications, let’s add another one: Macro and Micro Lending. By SBA standards a macro loan is over $100,000 to $1 million, and a micro loan is loan under $100,000. Here again, the picture is muddy because as of August 2012:
“Larger loans grew while smaller loans fell. Business loans of over $1 million grew by 5.8 percent in 2011 in terms of dollar volume. This is a big change from the 8.9 percent drop such loans saw in 2010. By comparison, outstanding small business loans as of June 2011 were valued at $606.9 billion, a decline of 6.9 percent from the same time the previous year. The value of the smallest C&I business loans (micro loans less than $100,000) declined by 12.7 percent.” [SBT]
This information would appear to support the idea that a smaller number of businesses were borrowing larger amounts of money, and as of last August (2012) the value of micro loans had declined. If this trend is holding then we may have some legitimate cause for caution when looking at the most recent Thomson-Reuters PayNet Small Business Index graphic.
The graphic does show what should be interpreted as a recovery in Business Lending for small businesses from the depths of March 2009 to June 2013. One of the issues with this index, and with reporting it as an infallible guide to the economic health of American small business, lies in the volatile nature of the lines — one month the headline would be a glowing “Small Business Lending Increases,” and the next might be a gloomy recitation of why “Small Business Lending Decreases.” Monthly headlines should be read with a hefty dose of caution.
Another reason to tread cautiously with this data is the old maxim: Happy people borrow, Sad people save. In other words those who feel secure with their finances are far more likely to entertain the notion of incurring debt. To explore this avenue, there’s another index from Wells Fargo.
Let’s assume for the sake of consistency that those small business owners who have seen their finances improve over the past 12 months are those more likely to take on more debt. The current number is 59% — that is, about 60% of small business proprietors report more secure financial status over the past year.
More specifically, of the second quarter of 2013 small business owners who saw their finances improving constituted about 59% of the total respondents. Again, this is progress, but should be tempered with numbers from years past — or at least previous to the last recession — in the third quarter of 2007 there were 82% of the total respondents reporting they were optimistic about an improvement in their finances. [Wells Fargo pdf]
There is a third perspective from which to evaluate the prospects for increased Business Lending, especially for small businesses. How do business owners report their past year revenues?
In the second quarter 2013 10% of the bank’s survey reported their revenues had increased very positively, and 27% said their revenues had increased a little. It wouldn’t be shooting too far from the mark to suggest that if 37% of business owners see their revenues in positive territory those will be the ones more likely to take on debt. This leaves us with another 38% who, perceiving their revenues more negatively, are more unlikely to incur indebtedness. [Wells Fargo pdf] These numbers are also well short of the 48% of small businesses reporting increased revenues in September 2006 — as in about 10% short.
Perhaps this is the time to ask: Is the New Normal an economic situation in which businesses at the larger end of the small business spectrum are more likely to take on debt (or, avail themselves of Business Lending) and smaller companies — those which might be more likely to apply for micro-loans — are holding back waiting for better finance and revenue statements?
It does take two to make a market, and if the potential borrower doesn’t see fairly clearly how a loan will be repaid then all the promotion and cheerleading from the banking sector isn’t going to move the needle too far in terms of increasing Business Lending to very small operations.
Who’s Borrowing What?
The latest publication of the SBA Office of Advocacy’s Small Business Lending in the United States (2011-2012) [pdf] gives us some information about the nature of the loans being backed by the SBA.
The commercial real estate loans are down, but we’d expect that in the wake of the Mortgage Meltdown. The loans which may indicate business activity such as new equipment purchases or hiring, the commercial and industrial category, are also still sluggish. C&I loans for $100,000 or less totaled $131.2 billion in 2007, by 2012 the total was $120.2. Loans in the $100,000 to $250,000 category totaled $57.5 billion in 2007 and $43.6 billion in 2012. Loans in the $250,000 to $1 million range totaled $138.0 in 2007, dropping to a total of $113.5 as of 2012. Interestingly, and predictably, 75% of these loans were made by “large lenders.” (*Information concerning the top micro and macro small business lenders in Nevada can be found in Tables 3+ and 4+ in this report.)
It’s reasonable to assume that we’re looking at several factors in play in terms of small business lending. First, there’s the bank consolidation in the aftermath of the 2007-2008 banking debacle. Secondly, we may be looking at a slight easing of lending standards for micro and macro loans. Third, nationally speaking we’re still below the business lending volume and values of pre-Recession America. The last line in the conclusion section of the SBA report sums up the situation succinctly: “As economic uncertainty persists, capital markets serving small businesses remain cautious about providing more capital, while small businesses are hesitant to acquire more debt.”
The phrase “economic uncertainty” is tossed about almost more casually than it’s cousin “small business.” There is a measure of truth, and a handful of obfuscation applied when the phrases are bantered about by politicians. Those advocating for the financialists among us — such as the allies of the big banks in Congress — are wont to conflate the “uncertainty” of Wall Street speculators who decry any attempts to regulate their trading operations with the uncertainty of Main Street, those businesses which still feel the bind created by low revenues, decreasing or stagnant demand for goods and services, and their legitimate concerns about future income.
Thus when Senator Sludgepump or Congressman Bilgewater pontificate about the Uncertainty Factor some extra care is required to differentiate between whose “uncertainty about what” that might be.
What is certain is that increasing Aggregate Demand for American goods and services is the engine which will improve those small business financial statements and income reports, and this would have a predictably positive effect on those Business Lending statistics.