For the first half of 2012, small business lending has been like a roller coaster ride with steep, scary drops and a few slow inclines – everyone put your hands in the air!
December 2011 – The initial ascent on this roller coaster ride – that long, slow climb to the peak, right before the bottom falls out.
At the end of last year, small business owners began to see some signs of hope in regards to landing that much needed business loan – capital needed to grow their business or too just simply survive the continued economic flat line.
In fact, according to a study that measures the overall volume of lending to small businesses in the U.S., the Thomson Reuters/PayNet Small Business Lending Index, December 2011 saw a 19% increase in financing to small businesses – marking the 17th consecutive double digit increase. Not bad given the tumble the credit markets took (especially to small businesses) in 2007.
This December increase put small business lending at its highest level since the market crash. Interestingly enough, December also marked the largest growth in the U.S. economy over the prior 18 months – coincidence? Maybe. Or, did this increased small business lending drive additional economic growth?
January 2012 – The Beginning of the trills (or frights) to come.
Small business owners seemed to, according to CNBC, back off in the first month of the year. While it might have appeared that banks and other lenders were still willing to approve these loans (loans under $1 million), small businesses retreated.
“Business owners remain spooked by the events of the past four years, and are assuming less risk,” stated William Phelan, president of PayNet. He further went on to declare that while many expected that small firms would begin to take on more risk in acquiring business capital, that instead, “… we’re seeing a plodding expansion.” – Small businesses owners just sitting back and watching what the New Year would bring after the stealer end to the previous year.
February 2012 – Downward hairpin turns just to keep the riders in their seats.
The Thomson Reuters/PayNet Small Business Lending Index for February showed lending slightly up over January (some 0.10%) but was still considered rather flat. In fact, the meager increase for the month was the lowest over the pervious 12 months.
However, overall economic growth was slow as well – most likely related to the cooling off after the anxious holiday season.
March 2012 – More twists and turns to set up the next stomach churning section.
Again, the Thomson Reuters/PayNet Small Business Lending Index for March showed sagging results; blaming March’s downturn on a slowing overall economy – even as consumer spending showed modest increases.
Once more, is one leading the other? Is the draw back or lack of confidence from small business owners driving down the economy or is it the lifeless economy prompting small businesses to pull back? In either case, the Federal Reserve (Fed) was forced to announce that it was keeping interest rates at near bottom level for the next 2 years or so.
So, March showed low interest rates yet, according to Reuters, small entrepreneurs were just more focused on paying back debt as opposed to expanding their operations. Further, according to the Federal Reserve Board, “On net, bankers reported having eased their lending standards on commercial and industrial loans to all firms and having experienced an increase in demand from firms of all sizes.” But, clearly loan volume was down and those loans that were approved were funded for smaller amounts on average.
April 2012 – The bottom of the first leg of the ride allowing the riders to catch their breath.
April began to show how the U.S. economy was forcefully slipping backwards and many small businesses took notice. According to the month’s research by PayNet, April completed a fourth straight month of decline – down 2% from the previous month. Reuters could only describe it as a “cooling” period.
Small business owners blamed the banks (and other lenders). Lenders blamed low demand from borrowers. Governments blamed both. But, underlying all the rhetoric, it was clearly the uncertainty in the economy – healthcare, regulation, moderate consumer spending and taxes – that was holding all parties (banks and borrowers) back.
May 2012 – The loop-to-loop section.
The overall poor economic measures in May, slowing housing, poor consumer confidence and stalled spending, started the talks once again about a double dip or at least another recession – one that could match or beat the last Great Recession.
The one shinning light, however, was lending to small businesses. According to Thomson Reuters/PayNet Small Business Lending Index for May, lending rose significantly (some 12.22%) to the highest level in over seven months – all the way back to October 2011 levels.
This was one of the few times that lending to businesses did not positively correlate to the state of the economy. Some yelled that it was a fluke; others claimed victory and most believed it was just a ramp up for summer – to acquire new materials and inventory for the upcoming season.
But, it was good to see that there were still some entrepreneurs willing to take advantage of low interest rates and lenders willing to fund strong balance sheets.
June 2012 – Completing the loops.
June took the credit markets right back to were they started a month earlier. June’s lending level slipped back to the lowest since the previous October – giving back all of May’s gains.
But, it could only be expected as the loss of momentum in the economy translated to renewed uncertainty for small business owners. Thus, instead of taking more risk, they again, focused on shedding the debt they already had.
Of the first six months in 2012, June completed the fifth month of declines in small business lending (although not consecutive) and continued to incite new speculation that the U.S. economic slowdown would continue (after the high, but naïve hopes in May).
(July numbers are not out at time of this writing).
Keep in mind that the summer months tend to be slow for business expansion and thus demand for new capital is inclined to dry up even further. Bankers like to vacation during the summer months and tend to review fewer deals. Some fortunate entrepreneurs will also go on vacation – taking their thoughts of accessing capital with them. And, for the rest, as consumers are also apt to spend more during this time, most small business owners will shift the majority of their time and focus on competing for those vacation dollars.
The Rest Of 2012
So, what will the rest of this ride look like as we pass through the second half of the year? Well, that is really up to the engineers behind the coaster ride or in the case of small business lending it is up to both borrowers and creditors.
But, so far, each just seems content on blaming each other – waiting for the other one to make the first significant move.
According to an article from seattlepi.com on the first of August, 2012, the National Federation of Independent Business recently concluded that many small business owners seeking new debt capital feel that “banks are making it harder for small companies to borrow.” Yet, other research, even that of PayNet, found that banks, this year, have loosened their lending requirements in hopes of increasing demand.
So, maybe it not the banks faults, who claim that demand is down, but it could be that many small business owners have either found other ways to finance their growth, given up looking for capital in this market or just simply holding back during this summer season.
In either case, small business lending in trending downward and is expected to stay that way until the Fall. Then, it is hoped that it will return to last year’s levels and correlate into increase borrowing, spending and hiring for the 2012 holiday months – provided the upcoming elections begin to easy some uncertainty.
But, what this year’s roller coaster ride has shown, thus far, is that as small business lending goes, the economy will surely follow and that current lending trends will make any hope of an economic turn around in 2012 nearly impossible until entrepreneurs can be reasonably ensured that they can access capital when and where they need it – without fear of future tightening of credit underwriting standards or the pulling back of credit by banks and other small business lenders like was seen in 2008 and 2009.
So, sit down, strap in and hold on because it is gearing up to be a wild second half ride.