Credit cycle turns against small business - San Diego Union-Tribune


A recent article in the San Diego Union-Tribune highlights the difficult access for small businesses to bank lending. Unlike past business cycles, even during the recent years of economic expansion, normal bank loans have not been readily available for small companies:

“It’s never been easy to raise capital for a small business.

The degree of difficulty usually runs in cycles, with periods of tight credit and risk aversion giving way eventually to easing and optimism, followed by recession and another round of capital scarcity.

"Yet this cycle is different. Despite record sales and profits in 2015 for companies great and small, bank credit appears to be contracting for small-business owners…. Credit remains a key lubricant for economic growth for companies that get past the startup phase and need capital to expand further.”

The article also highlights a local pizza restaurant, which has turned to alternative sources of lending in order to finance its expansion. Unfortunately, not every small company or startup has access to alternative sources of capital.

After the Great Recession of 2008 – 2009, banks have been tightening credit for small businesses for the last three years and, especially, in late 2015. This has been true nationally as well as here in the San Francisco Bay Area and, even, Silicon Valley.

“Such movement in standards has shifted opportunities for expansion to larger competitors. From the first quarter of 2010 through the third quarter of 2015, the share of loans going to California’s small businesses shrank from 23 percent to 15.4 percent, state officials report.”

In past business cycles, smaller community banks have often played a crucial role in lending to small businesses. One executive of a community bank reflects that:

"... many of his potential customers [have] been turned down by larger banks without explanation. Community banks often fill this gap by identifying problems with such nitty gritty as financial accounting, collections and cash flow management.

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