The outlook for small business expansion remained bleak for most of 2010 as fewer and fewer business owners sought to access credit; a trend that has continued since 2009, according to a new report.

The report, “Small Business and Credit Access,” from the National Federation of Independent Business, found that the current challenging economic environment has resulted in a reduction in the number of small businesses seeking credit in 2010, and an increase in the number of discouraged borrowers, or those who have ceased attempts at accessing credit. On a more positive note, there were slightly fewer unmet credit request in 2010 than there were in 2009.

“Unfortunately, the economic atmosphere for small businesses did not improve much in 2010,” said NFIB Research Foundation senior fellow Denny Dennis, who wrote the report.“ Despite an active legislative session, new federal policies have fallen short; they have failed to address the underlying real estate and demand problems that have caused our markets to dive and now stagnate, and they have failed to quickly and effectively aid small businesses in their struggle to grow in the current unfavorable economic conditions. This recovery period will be unique, and we don’t expect credit levels to reach the levels they did a decade ago.”   

However, the survey findings are consistent with other lagging indicators, suggesting that confidence is steadily, albeit slowly, growing among small business owners. But even as demand for credit begins to rise and as companies again start to expand and make capital investments, progress is likely to be slow and difficult; the environment for small business likely becoming worse before it becomes better. 

The report found that 41 percent of small employers who formally attempted to obtain credit in 2010 got all they wanted.  Nineteen percent got “most,” 18 percent got “some,” and 16 percent were shut out.

Credit access relates to the purpose and/or the aggregate number of purposes for borrowing.  The most common purpose for which credit was sought in 2010—cash flow—was also the one alone or in combination that was most likely to be rejected.  The more purposes for which credit was sought, the less likely the applicant would obtain credit.

Second and third attempts to seek credit (after an initial line or loan was rejected), proved beneficial to small business owners in 2010. Success typically declines with each consecutive institution approached, but approvals appear high enough at fall-back institutions to warrant the effort. However, success appears rare beyond three attempts.

Credit cards are generally easier to obtain than other forms of credit. In 2010, 95 percent of applicants were granted a credit card on the first attempt or did not receive one at all.

Credit cards are far and away the most commonly used form of credit for small businesses.

Forty-five percent of small employers use personal credit cards to pay business. Fifty-eight percent of small employers employ a business credit card(s) to pay business expenses. About 24 percent of the small employer population currently uses a credit card as their sole credit source; however, they do so by choice and most have credit alternatives.

Small business owners who carry large credit card balances generally have reduced chances of accessing additional credit sources.

In 2010, the percentage of small employers applying for credit fell from 55 percent in 2009 to 48 percent in 2010. However, the percentage approved for credit rose somewhat, leaving about the same number accessing credit in 2010 as accessed it in 2009. When weaker prospective borrowers reenter the market as economic conditions improve, it is possible, if not likely, that credit access for the overall population will deteriorate before it gets better.

Fifty-two percent of small business owners did not attempt to borrow in 2010. Over four out of five non-borrowers assumed that status because they did not want more credit.  Fifteen percent were discouraged borrowers, that is, small employers who wanted to borrow, but did not bother to apply because they did not think they could obtain credit. Twenty-four percent who did apply pared down their request for fear of being rejected.

Competition for small business’s banking, which had been rapidly increasing since 1980, came to an abrupt halt in 2010. Small business owners receive better treatment in their credit needs from small banks than large ones. However, the market share of small banks for small business customers appears to have declined over the last year.

Although the real estate situation appears to have improved over the last year, ownership continues to be a major drag on small business’s capacity to borrow.  Ninety-five percent of small employers own real estate, while 68 percent have at least one mortgage, 17 percent have at least one second mortgage, and 12 percent have at least one collateralized.

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