The year 2011 was supposed to be a time when stringent lending slackened, giving small businesses more opportunities to obtain much needed loans. Unfortunately, this just has not been the case so far. A recent study by Pepperdine University found that only 17% of loan-seeking companies with less than $5 million in annual revenue have acquired bank loans in the past six months. This 17% is in contrast with the 37% of large businesses – those with greater than $25 million in revenue – that have received bank financing. These numbers paint a picture much different than the one prognosticators laid out less than eight months ago.
Why Has Small Business Lending Not Picked Up?
There are several explanations as to why 2011 has not ushered in the return of small business lending as many predicted it would. First, a major issue currently facing many small businesses seeking loans is that these companies often simply do not have enough valuable property to use as collateral for the loans they are seeking. This, by itself, is nothing new. What is new and seems to be a self-reinforcing problem, is the decrease in value experienced by commercial properties – usually a stalwart of business collateral – in the wake of the subprime lending meltdown.
The Dodd-Frank Act was heralded as a way to reign in the rampant risk-taking behaviors seen over the past decade, and in some part, it has. An unfortunate byproduct of the law, however, was a reduction in lending to small businesses. Under the law, banks are required to maintain higher reserves than previously, which forces them to be more selective in where they place the funds which can be invested through loans and other means. While this may be seen as a way to keep banks from over leveraging themselves, it also serves as an unnecessary barrier to small business lending, traditionally viewed as risky.
How May the Debt Ceiling Debate Affect Small Business Lending?
The current debate in Congress over whether or not to raise the debt ceiling will undoubtedly have a disparate impact on small businesses – immediate and long term. If the debt ceiling is not raised and the U.S. defaults on its debt, it is likely that interest rates will jump across the board, making it more difficult for businesses to attain affordable credit. It is foreseeable, as well, that the volatility in the stock market and general level of fear across the nation could tip further towards recessive behavior, causing an increase in layoffs and sucking the wind out of any small business growth.
If, on the other hand, the U.S. manages to pass legislation raising the debt ceiling, a credit rating downgrade for treasury bonds would be highly possible. As treasury bonds are the benchmark against which almost all other U.S. debts are measured, a downgrade from a AAA rating to AA would cause a ripple effect of increases in interest rates around the nation. Though the increase will probably not be as drastic as the former scenario, it would be felt by small businesses in Texas.
Needless to say, the whole situation is complicated by political undertones as each side strives to push its own agenda and support different avenues of action, such as spending cuts, entitlement cuts, and tax raises.
Come August 2, the deadline for action by Congress and Obama on the debt ceiling issue, Texas businesses can expect to have a more coherent picture of the government’s direction. Regardless of how the matter plays out, it is clear that Texas small businesses will feel the effect and can expect to see a rise in interest rates and a further tightening of lending standards over the short term.