Banks Still Not Lending to US SMEs
Even as the start of an economic recovery provides a boost to US businesses, many small and medium-sized enterprises (SMEs) are finding that their improving financials still fall short of banks’ newly rigorous credit standards.
That finding, from the results of a new Greenwich Market Pulse, helps explain why US companies say it is harder to obtain credit now than it was a year ago in the depths of the economic and market crisis. Approximately 55% of US small businesses say it has been harder to secure credit so far in 2010 than it was during the same period last year – including one-third saying it has been “much harder”. Half of mid-sized companies agree that it has become more difficult to secure credit.
Greenwich Associates tracks US corporate credit conditions through the Greenwich Credit Availability Index. The index score, which is based on the results of quarterly surveys of more than 500 SMEs, reflects a net calculation of the number of businesses that see credit conditions improving versus those reporting deterioration.
Although the index has been mired in negative territory since the second half of 2007, it began to climb in the direction of a positive reading at the end of the second quarter of 2009 for mid-sized companies and at the start of the third quarter for small businesses. “That rebound has stalled in 2010,” said Greenwich Associates consultant Chris McDonnell.
Optimism Builds About Economy and Business Prospects
The continued lack of access to credit is especially frustrating for owners and executives of SMEs who are increasingly optimistic about the economy and say the financial condition of their own businesses are improving. Among small businesses, the proportion reporting that their financial condition had deteriorated over the past 12 months declined to approximately one-third in March 2010 from 46% in July 2009, while the share reporting financial improvement increased to one quarter from 20% and the share reporting no change jumped to 41% from 33%. The shift was even more dramatic among mid-sized companies as the share reporting deterioration in their financial condition dropped to 26% in March 2010 from 41% in July 2009, while the proportion reporting improvement rose to 35% from 21%.
Banks and Borrowers Not Seeing Eye-to-Eye
Although these results suggest the worst might be in the past for SMEs, owners and executives of these companies also see evidence of a troublesome disconnect: despite the rebound in the economy – not to mention significant support from government in the form of monetary and fiscal stimulus – banks are not picking up the pace of lending. Only 24% of small businesses and 22% of mid-sized companies borrowed money over the past three months, shares that were down from the 27% and 29% reported respectively in January of this year, and down significantly from the 46% of small businesses and 40% of mid-sized businesses that reported borrowing in September 2009.
In the most recent Greenwich Market Pulse, participating companies were asked to evaluate the top 15 US commercial banks to indicate whether these banks were “stepping up to provide credit” or “not lending to an appropriate degree”. By aggregating the responses, a “net willingness to lend” score was calculated for each bank. The results were not encouraging. Among small businesses, not a single US bank received a positive score for willingness to lend, indicating that these companies do not think any bank is lending to an appropriate degree. Among mid-sized companies, a large majority of banks (11 of the 15 banks on the list) received either negative or neutral scores. Among both groups, national banks received the lowest scores for their willingness to lend.
Stricter bank credit standards are having a disproportionate impact on smaller companies, which are likely to be seen as less creditworthy than companies at the larger end of the middle-market category. “Thirty-six percent of the small businesses participating in our Market Pulse survey say they are using credit cards to meet their capital needs,” said Greenwich Associates consultant Pete Garrison.
Credit Recovery Will Start at Top End of Middle Market
However, four banks, including Wachovia/Wells Fargo, Regions Financial, National City/PNC, and Zions Bancorp, received positive scores from mid-market companies, indicating that in aggregate, a majority see them as stepping up to extend credit.
“These results provide a glimpse at how the pick-up in bank lending will unfold and to some extent is already playing out,” said Greenwich Associates consultant David Fox. “Banks that are still pressed for capital and reluctant to add risk to their loan portfolios will first increase the amount of capital available to larger companies with more reliable financials, meaning that the lending recovery will begin in the middle-market and then extend down to small businesses only gradually.”