Turning off the spigot: The small business lending decline, explained in one chart

Written by J.D. Harrison

A number of reports from bankers, economists and small business groups have shown that lending to small businesses has failed to recover in the wake of the recession.

A new study, though, shows that the slowdown began long before the economy started to collapse.

Cleveland Federal Reserve analysts published the paper last week, which indicates that the flow of loans to small companies remains very slow and is not likely to pick up anytime soon. In addition, as you can see below, their findings show that the relationship between small firms and banks started to grow cold more than a decade ago, at a time when the economy was still expanding.

The chart shows the percentage of nonfarm, nonresidential loans were small; a reliable measure, researchers suggest, of the share of all commercial lending that went to small businesses.

(Cleveland Federal Reserve / FDIC data)

While the decline accelerated ever so slightly following the recession in 2008 and 2009, the authors point out that “banks have been exiting the small business loan market for over a decade” resulting in “a decline in the share of small business loans in banks’ portfolios.”

The report goes on the show that a multitude of factors have contributed to the slowdown in assistance to Main Street. For one, weak financials from the past few years and declining property values have made it difficult for small business owners who want loans to qualify for credit, particularly because banks have heightened their lending standards in the wake of the recession.

Related: Small business lending freeze spread evenly across banks

Meanwhile, consumer demand has dropped off, leaving fewer employers looking for capital to expand their firms.

Given that there is no one problem at the root of the lending freeze, and thus no one silver bullet, the authors suggest it may be be some time before the market begins to thaw.

“This confluence of events makes it unlikely that small business credit will spontaneously increase anytime in the near future,” Cleveland Fed’s Ann Marie Wiersch and Scott Shane wrote in the report. “Given the contribution that small businesses make to employment and economic activity, policymakers may want to intervene to ensure that small business owners can access the credit they need.”

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