Loaning to Small Businesses and Their Decline
The statistical accountants told by banks and regulators are often incompatible. On one hand, bankers show statistics that insinuate that small business lending is improving. On the other hand, regulators (such as the Federal Reserve) say that small business lending has declined. How can both be true? Below, we explore the paradox.
Banks always present data favorably to the public. They use persuasive language to convince the public that they adhere to “American graciousness” through “bailing out” to improve small business lending. Notoriously, banks analyze new or renewed loans made in a particular quarter and compare with previous ones.
Regulators consider all outstanding loans in their calculations regardless if they are old, new or renewed. In a precarious financial climate, regulators will include loans that cannot be paid by failed businesses.
In either scenario, the balance of the financial market declines. People are either paying off or defaulting outstanding loans and new loans are not enough to offset the decline.
In either case, the objective is to pay off loans. The predicament is businesses paying off old loans while also not qualified to obtain new ones with better terms. In most cases, businesses are scared to ask for new loans because they live in economic uncertainty. As a result, small businesses that earn less than $20 million cannot grow nor create jobs.
When do new loans offset the decline of the credit market? When do the people obtaining loans surpass the total number of people defaulting or paying off business loans? The answer depends on the job market and consumer spending. Consumers must feel confident they can keep their jobs and thus will spend money: it’s a continued cycle. In order to gain palpable recovery in the marketplace, we need substantive lending to small businesses. Banks are hesitant because they feel like they won’t be repaid with unemployment stats and low consumer sentiment.