Small isn't beautiful

Two Cleveland Fed economists, Ann Marie Wiersch and Scott Shane, see lean times ahead (and back) for the nation's small businesses;

Small business lending has dropped substantially since the Great Recession. ....in the fourth quarter of 2012, the value of commercial and industrial loans of less than $1 million—a common proxy for small business loans—was 78.4 percent of its second-quarter 2007 level, when measured in inflation-adjusted terms. ....

Policymakers have become concerned that the decline in small business lending may be hampering the economic recovery. Small businesses employ roughly half of the private sector labor force and provide more than 40 percent of the private sector’s contribution to gross domestic product. If small businesses have been unable to access the credit they need, they may be underperforming, slowing economic growth and employment.

Which is consistent with slow improvement in the labor market, especially for lower skilled and educated workers. 

.... Bankers say the problem rests with small business owners and regulators—business owners for cutting back on loan applications amid soft demand for their products and services, and regulators for compelling the banks to tighten lending standards (which cuts the number of creditworthy small business owners). Small business owners, in turn, say the problem rests with bankers and regulators—bankers for increasing collateral requirements and reducing their focus on small business credit markets, and regulators for making loans more difficult to get.

In our analysis, we find support for all of these views. Fewer small businesses are interested in borrowing than in years past, and at the same time, small business financials have remained weak, depressing small business loan approval rates. In addition, collateral values have stayed low, as real estate prices have declined, limiting the amount that small business owners can borrow.

Cash flow uncertainty, anyone?

Lenders see small businesses as less attractive and more risky borrowers than they used to be. Fewer small business owners have the cash flow, credit scores, or collateral that lenders are looking for. According to the latest Wells Fargo/Gallup Small Business Index, 65 percent of small business owners said their cash flow was “good” in the second quarter of 2007, compared to only 48 percent in the second quarter of 2013.

Can the unsettled state of Obamacare be helping?