Credit Supply and Demand: What to Make of the NFIB Survey?

A recent survey by the National Federation of Independent Businesses (NFIB) has garnered some attention for suggesting that demand for credit among small businesses is the problem, rather than a restricted supply due to tighter lending standards. The implication is that, contrary to President Obama's recent proposals to expand the flow of credit to small businesses (and our own discussion here on Growthology), the credit pipeline is secure if only businesses would access it. With consumer demand still rather sluggish, small businesses may see little reason to pursue new credit. 

Clearly, many businesses face difficulties in obtaining credit from banks; indeed, the weight of anecdotal evidence seems to support the notion that this is a supply problem, as do other surveys pointing to a spike in the number of companies reporting difficulty getting loans. I spoke with Ann Meyer of the Chicago Tribune last week who noted that not one company she has encountered in Chicago reports an easy time of getting credit. The Kauffman Foundation's recent work in Detroit seconds this perspective. 

And, indeed, the October Federal Reserve Senior Loan Officer Survey did find that "domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households." Supply of credit, in other words, continued to be an issue.

But that's not the whole story. The Fed survey also indicated that the percentage of banks tightening standards has fallen over the last year--the supply pipeline is easing. In fact, the percentage of banks reporting tighter standards for loans to small businesses is at 2007 levels. Demand, moreover, "for most major categories of loans at domestic banks reportedly continued to weaken," albeit at a somewhat slower pace.

The question of credit, particularly to small businesses, is a thorny issue. Supply and demand both seem to be at work here, with the preponderance either way likely to vary by region. Meyer, in fact, pointed out that a problem with the NFIB survey is that it is skewed toward non-urban regions and businesses and thus doesn't represent the business conditions in places like Chicago. This seems like a fair point and echoes other criticisms of the NFIB. Two further issues require brief mention.

One is the apparently ballooning problem in commercial real estate with, by some estimates, half a billion dollars in bad loans preparing to come due and eat up banks' balance sheets. What does this have to do with credit for small companies? As the Atlanta Fed recently pointed out, the banks holding a large chunk of these CRE loans also happen to be the same banks that lend to small companies. 

Second, any discussion of credit for "small" businesses inevitably elides over an essential corner of the economic universe: new and young companies. True, these are often coterminous with small business, but it doesn't mean the interests of a five-employee startup will coincide with the interests of a five-employee, 25-year-old company, particularly in different industries. Credit problems pertaining to "small" businesses won't necessarily apply to new and young firms, especially since a primary source of financing for the latter category is the proverbial trio of family, friends, and fools, as well as personal credit cards. True, using one's credit card or home equity line isn't exactly easier than it was two or three years ago, but this means an easing of credit availability aimed at "small" businesses may not have (much of) an effect on the fortunes of new and young companies, which are the real sources of job creation in the American economy.

Comments

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Tim: As I wrote on my blog, Truth on the Market, I think Tyler is pretty far off base with this one. See http://www.truthonthemarket.com/2009/04/28/what-does-tyler-know-about-law-and-economics-anyway/

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