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Posted at 01:03 PM ET, 02/16/2012

More small employers are seeking credit – and more are being turned away

Substantially more small business owners sought credit from financial institutions last year than in the year prior, but the number that actually obtained it remained virtually unchanged, according to a new study. That means an increasing number of employers watched the doors to the credit market slam in their faces in 2011.


Despite increased demand, the number of small employers that obtained credit remained unchanged at roughly 1.6-1.7 billion, the same as previous years. (Creative Commons licensed photo by Joelk75 )
Nevertheless, owners say that problem still pales in comparison to the ones created by economic uncertainty and persistently weak sales.

More than half (57 percent) of small business owners attempted to obtain credit in 2011, up from 48 percent in 2010, according to the National Federation of Independent Business’s annual small business credit report released Thursday. Meanwhile, demand for credit lines and cards increased by a third during the year.

However, the percentage of small employers that secured all or most of the credit they were seeking sank from 60 percent in 2010 to 50 percent in 2011, and as a result, despite the significant increase in demand, the number of small business owners that secured credit remained unchanged at roughly 1.6 billion to 1.7 billion.

“The many fruitless attempts by policymakers to understand and improve the credit market for small businesses are due to the fact that they have thus far failed to adequately address the root causes of the economic crisis — lost confidence and uncertainty, and the housing crisis,” William J. Dennis, NFIB senior research fellow, said in a statement.

Emphasizing the latter point, Dennis pointed out that 92 percent of the small employers surveyed own some form of real estate and 19 percent are currently using mortgage proceeds to finance their businesses. As a result, he said, stubbornly low real estate prices and the weak housing market continue to “drag on the small business economy” and prevent employers from pouring more capital into their companies.

But while credit trouble may represent a serious hurdle for some small business owners, sales and uncertainty present far greater and more frequent problems. One out of three employers surveyed said political and economic uncertainty is the most important finance issue facing their firm, while 23 percent pointed to weak sales. Only 15 percent listed credit problems as their top concern.

Among the other findings in the report:

● A disconnect exists between the credit market perceptions of lenders and small business owners, as lenders think credit standards have not changed or have eased over the year, while business owners think they have tightened.

● Small business owners are turning away from small banks, as almost half of them now consider one of the largest 18 banks in the country their primary financial institution. Only 20 percent primarily work with a local or community bank, marking a sharp decline over the past three years.

● Poorer credit risks were more likely to try to borrow in 2011 than better credit risks, other factors equal. Men and owners of larger small businesses were also more likely than their counterparts to try to borrow.

Follow On Small Business and J.D. Harrison .

By  |  01:03 PM ET, 02/16/2012

Tags:  small business, credit

 
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