The Credit Crunch Myth: You Can't Fix What Ain't Broke
Have you heard about the credit crunch? Of course you have. Everyone has. As far as small businesses are concerned, the story goes that the recovery is stalled because the nation's lenders are being stingy with credit.
So, in an effort to fix the problem, the American Recovery Reinvestment Act (ARRA) authorized $730 million in funding for the SBA to:
- increase the level of SBA loan guarantees to (up to 90%),
- allow borrowers to use SBA funds to replace existing debt,
- expand the SBA microloan program,
- reduce loan fees, and
- create a new $255 million emergency loan pool (American Recovery Act Loans).
Only one problem: There may not be a small business credit crunch at all.
Since 1973, the National Federation of Independent Business (NFIB), a 400,000-strong small business membership organization has asked its members — a statistically valid sample of U.S. small businesses — about their borrowing needs and experiences.
Their late-2009 poll showed only 8% of small employers consider access to credit an immediate concern. The real problem, cited by more than half of the respondents, was slow or declining sales (51%) and economic uncertainty (22%).
Of the 55% of the NFIB business owners surveyed who said they had applied for credit, 40 percent received some (13%), most (12%) or all (22%) of what they required.
Less than 20% of those surveyed didn't get a loan because they were turned down, didn't like the terms offered, or simply didn't apply for fear of rejection. Among those declined for credit, twice as many cited poor sales as the reason, not credit rationing.
So, what's the real problem? According to NFIB Economist Dr. William Dunkelberg, "There seems to be general agreement that uncertainty keeps business owners from expanding their business and hiring, keeps consumers from spending more, and keeps investors from investing in the stock market.
Dunkelberg gets more specific about the problems in the NFIB Small Business Economic Trends report (January 2010):
Twenty-four months of recession have sapped the financial strength of many small firms that are too numerous now in the new spending/credit environment. Many that "need" credit are likely 'marginal' and don't have the record to support a loan. Too many houses were built, too many strip malls opened, too many restaurants started, too many new retail outlets were launched in the 2003-2007 period and all of them cannot be supported by a consumer that now chooses to save.
Washington still doesn't get it. It pays lip service to the fact that small business generates half of private sector GDP and employs 60 percent or more of private sector workers, but when it comes time to provide help, two failing car companies with union employees get $80 billion and small business gets $30 billion IF banks decide to accept the funds to support loans and IF the owners can subsequently get a loan from a bank. ..."Stimulus" for this administration has not focused on supporting consumer spending nor been designed with a sense of urgency as central to policy formulation.
And Washington clings to the false notion that it is a lack of loans that is keeping small firms from hiring. We are building less than half of the number of housing units normally constructed, putting a huge dent in mortgage and construction loan demand. We are buying two-thirds the number of cars normally purchased, so auto credit demand is way off. Plans for capital expenditures and inventory investment among small firms are at 35 year lows. Even large bank CEOs now admit loan demand is weak! So loans are not in short supply, but reasons to get loans certainly are.
Lenders and investors live by the mantra: "Never throw good money after bad." What that means is, if you haven't addressed the fundamental problem, in this case lack of sales, throwing money at it is only going to delay the agony. Sales have declined for most U.S. companies over the past two years. Those that haven't cut costs enough to maintain profitability are going deeper in the hole every month. Without a plan to increase sales or decrease costs, new money will offer only a temporary fix.
The problem is, by trying to increase small business credit availability, we're not only throwing money at a problem that doesn't exist; we're creating a new one.
SBA loan defaults doubled last year. Last year, banks failed (140 of them) at the highest annual rate since the 1992 Savings and Loan Crisis. The "troubled bank" list now includes more than 700 financial institutions.
Don't forget, it's you and me, American taxpayers, who are ultimately on the hook for the SBA loans that go bad. Essentially, we're the unwitting (and speaking for myself, unwilling) co-signers on loans the nation's surviving lenders wouldn't touch without a guarantee.
Does it really make sense for the government to encourage banks to make bad loans? Isn't that what got us into this mess to begin with?