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Collateral Damage

More companies sought credit last year, but the number receiving it didn't keep pace.
Sarah Johnson, CFO Magazine
March 1, 2012

Despite moderate growth in the U.S. economy toward the end of last year, small businesses continued to face a challenge in securing credit. According to the National Federation of Independent Business (NFIB), much of the blame can be placed on the depressed real-estate market.

Nearly all of the 850 small businesses surveyed in the NFIB's annual credit report own some sort of property, and the declining value of those assets has affected potential borrowers' clout with creditors. Many small businesses have put up their property or even their owners' personal property to obtain funding. Nineteen percent of respondents have used proceeds from mortgages, and 15% have posted property to get a business loan.

"With depressed balance sheets and the loss of collateral [value], businesses that would otherwise be capable of borrowing can't," says William Dennis, NFIB senior research fellow. (For a comprehensive look at the credit outlook for smaller companies, see "Capital vs. Confidence.")

For each of the past three years, roughly the same number of small businesses (between 1.6 million and 1.7 million) obtained credit from a financial institution. But small businesses made more tries at getting a loan or line of credit in 2011, meaning more got turned away. The NFIB reports 57% of small employers sought a loan from a financial institution last year, a 9% increase over 2010. "Demand rose relatively
substantially . . . but we didn't see any net new people getting credit," says Dennis.

Another reason for the drop-off in credit, of course, is that some small businesses are still hurting financially. Last year, lenders received more requests from small-business owners with shakier credit profiles than from those likely to pay back their loan on time.

Companies were more interested in obtaining new lines of credit and credit cards than other kinds of loans in 2011, while requests for loans and line renewals were flat. In fact, only 29% of small businesses were carrying a loan as of the end of 2011, a decline from 44% three years ago.




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