Small Businesses Need Big Ideas: The Federal Reserve Examines the Challenges of Small Business Financing

By Farr, Jessica | Partners in Community and Economic Development, Summer 2011 | Go to article overview

Small Businesses Need Big Ideas: The Federal Reserve Examines the Challenges of Small Business Financing


Farr, Jessica, Partners in Community and Economic Development


According to the U.S. Bureau of Labor Statistics, small businesses accounted for 34 percent of new jobs during the last period of economic growth between 2004 and 2007. (1) However, in the recessionary years between 2007 and 2009, small businesses were responsible for 38 percent of job losses. (2) The clear consensus is that small businesses play a critical role in job creation and economic stability in this country, a truth that is sending researchers and policymakers in search of a better understanding of the challenges small businesses face and the interventions needed to bolster their job creation capacity and overall sustainability.

Access to credit is among the frequently mentioned barriers to the stabilization and growth of small businesses. To learn more about small business credit issues and to inform policymakers about promising practices to address credit needs, the Federal Reserve System engaged in a national initiative called "Addressing the Financing Needs of Small Businesses." This initiative combined qualitative data, collected directly from stakeholders, with academic research and quantitative data to develop targeted policy recommendations.

What Is Driving Small Business Credit Access Issues: Supply or Demand?

Small business owners and lenders agree that credit has tightened for small businesses in the past few years. Data from the Federal Financial Institution Examination Council (FFIEC) indicate that the outstanding volume of small business loans dropped from $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010. According to lenders participating in the October 2010 Federal Reserve Senior Loan Officer Survey, demand from small businesses was weaker in the last survey period, reportedly due to reduced financing needs for inventories, accounts receivable, and investments in equipment. Lenders also reported for the second consecutive survey that credit standards and terms for small businesses, which had tightened over the past four years, continue to ease. Clearly, supply-and-demand dynamics are at work in small business credit access. The question remains, however, what policies can best bring these dynamics into balance to both encourage safe lending and strengthen small businesses as loan recipients.

The Federal Reserve Approach: Convene, Listen, and Educate

LOCAL STAKEHOLDERS PAINT A PICTURE OF SMALL BUSINESS NEEDS

The Federal Reserve System convened more than 40 regional meetings across the country between February and July 2010 to look at the credit challenges facing small businesses. The events brought together lenders, small business technical assistance providers, small business owners, community development financial institutions (CDFIs), and government agencies to share their perspectives on small business credit access, technical assistance needs, and recommendations for addressing challenges. The findings of these regional meetings were compiled and presented before a national audience of decision makers, including representatives from the Federal Reserve Board, the U.S. Small Business Administration, and the U.S. Department of the Treasury's CDFI Fund at a one-day meeting held in Washington, D.C., on July 12, 2010. The Federal Reserve Bank of Atlanta supported this initiative by hosting meetings in all Sixth District states and contributing to a written summary document that served as an addendum to Federal Reserve Chairman Ben Bernanke's semiannual monetary policy testimony later that same month.

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Meeting participants across the country generally agreed that the economic crisis had negatively affected small businesses, leading to declining sales, weaker balance sheets, and diminishing asset values. In this inauspicious environment, small businesses have been reluctant to take on new debt. Moreover, the general creditworthiness of many small business owners had declined during the recession, making it much more difficult to be approved for loans. …

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