Small Business, Credit Access, and a Lingering Recession is the third annual credit study produced by the NFIB Research Foundation and examines the current economic atmosphere for the small-business community.

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Executive Summary:
 

• Uncertainty edges sales as the most important finance issue facing small business. The inability to obtain credit is the third most frequently cited finance issue followed by no finance problems. Half of small-business owners tie uncertainty to economic conditions, one-quarter to political/policy conditions, and one-quarter to a combination of the two.
• A disconnect appears between lenders and small-business owners. Lenders think credit standards have not changed or have eased over the year. Small-business owners think they have tightened. Owners also appear more sanguine over their immediate economic prospects than do lenders.
• Almost half of small-business owners now consider one of the largest 18 banks in the country their primary financial institution. Twenty (20) percent principally patronize a local or community bank, a sharp decline over the past three years. Though comparatively few list a credit union as their principal financial institution, the number has doubled since 2009.
• Competition for small business’s banking business steadily increased from 1980 to 2006, but has since declined sharply.
• Small-business owners continue to deleverage, part of a trend since at least 2009. Eighty-eight (88) percent of small employers either have credit outstanding or access to it (lines or cards). That number includes 47 percent with credit lines, 29 percent with a business loan, and 79 percent with a credit card(s) used for business purposes. Twenty-eight (28) percent with a card use it for credit; the remainder use it as a means of payment (transaction device) exclusively.
• The number of small-business owners possessing a business loan (not including lines or cards) fell noticeably between 2008 and 2011, from 44 percent to 29 percent. Possession of credit lines has also fallen 10 percentage points over the period, but not since 2009.
• Small-business owners are increasingly employing personal rather than business cards for business purposes.
• Fifty-seven (57) percent of small employers attempted to obtain credit from a financial institution in the last 12 months, a nine percentage point increase from 2010 with the demand for lines and cards each rising more than one-third. The demand for line renewals and loans were flat. More attempts resulted in more rejections rather than more small-business owners obtaining credit.
• Poorer credit risks were more likely to try to borrow in 2011 than better credit risks, other factors equal. A number of financial factors, such as credit score, differentiate the two groups. Men and owners of larger small businesses were also more likely than their counter-parts to try to borrow.
• Of those seeking credit from a financial institution in 2011, 34 percent were able to acquire all they wanted, 16 percent most of what they wanted, 24 percent some of what they wanted and 20 percent none of what they wanted. The 50 percent who are classified as getting credit and the 44 percent classified as not is less favorable than the 60 – 35 ratio in 2010, though similar to the 50 – 45 ratio recorded in 2009.
• An estimated 1.6 to 1.7 million small employers (out of 5.8 million) obtained credit from a financial institution in each of the last three years. The flat number acquiring credit and increased demand effectively means that none of the added demand acquired credit. All new 2011 market entrants effectively shut-out implies that credit standards changed or that nothing but poor credit risks entered the market during the year.
• In addition to several financial variables, factors differentiating small-business owners who were less successful acquiring credit compared to their counter-parts include those: located in states with the worst residential real estate markets, whose primary financial institution is a large bank, possess smaller, small businesses, located in areas other than rural areas or small towns, increasing employment, and decreasing employment. Credit card holders maintaining balances after monthly payments of more than $10,000 are virtually never able to obtain additional credit.
• Small-business owners had least difficulty getting line renewals and credit cards. Seventy (70) percent had line renewals approved and 74 percent had cards approved, though just 59 percent of those attempting acquired either with satisfactory terms and/or conditions. Another 11 percent and 15 percent respectively accepted the credit, but were dissatisfied with the terms and/or conditions.
• Small-business owners had most difficulty getting new lines and loans. Forty-six (46) percent were rejected for the former and 35 percent for the latter. Nine percent of prospective borrowers rejected an offered new line and 18 percent rejected an offered loan due to adverse terms and/or conditions. The total not successfully procuring a requested new line was 54 percent and requested loan 53 percent.
• Prospective small-business borrowers wanted credit for an average of two and one-half purposes during 2011. The most frequent purpose was cash flow (63%) with replacement investment (32%) and new investment (37%) among other less common purposes. Those wanting to borrow for fewer purposes were substantially more likely to acquire the desired financing.
• Just over half (52%) of small-business owners did not access the credit markets, at least via financial institutions, in 2011. Non-borrowers divide into disinterested borrowers, that is, those who do not want to borrow (34%), discouraged borrowers, that is, those who did not attempt to borrow because they did not think their request would be approved (7%), and rejected borrowers, that is, those who tried to borrow but were turned-down (11%).
• Fifty-four (54) percent extend trade credit to customers, though 30 points extend it selectively. Those who extend it are tightening their trade credit policies due in part to increasing delinquencies.
• Forty-seven (47) percent use trade credit. Those using large amounts of it, defined as making over 25 percent of purchases using trade credit, are more likely than others to possess more credit lines and loans and to have sought credit lines, loans and cards during the year.
• Small-employers continue to own large amounts of real estate and real estate related issues continue to be a major drag on small-business recovery. Eighty-nine (89) percent own their residence, 18 percent a second home, 20 percent their business premises, and 31 percent investment real estate that includes none of the former types. Overall, 92 percent own some form of real estate.
• Many have shed real estate since 2008 as the number owning residences, business (premises), investment real estate, and all three forms combined has fallen.
• Real estate supports much small-business financing. Nineteen (19) percent of small-business owners are currently using the proceeds from a mortgage to help finance the firm and a non-mutually exclusive 15 percent are currently using are their real estate for business collateral.
• Full small business economic recovery is not likely to occur until the real estate problem is “fixed.”