Credit Conditions Normalising for US Small Businesses, Finds Greenwich

New research from Greenwich Associates suggests credit conditions in the US are finally starting to return toward ‘normal’, and – for the first time since the start of the global financial crisis – the share of small businesses reporting success in landing bank loans is returning to historic averages.

The banking crisis and the onset of a global recession in 2008–2009 dried up the flow of bank loans to middle market companies and small businesses alike. Credit conditions started to improve in 2010 – but mainly for the strongest and most creditworthy middle market firms. Among small businesses and weaker middle market companies, bank lending activity remained depressed.

The results of a March 2011 Greenwich Market Pulse study suggest that the improvement in credit conditions experienced by top middle market companies in the first half of 2010 began extending into the lower ranks of the middle market and into the small business segment as the year progressed. “By the first quarter of 2011, loan demand and actual borrowing activity among small businesses and all middle market companies is recovering actively – and conditions now appear to be reverting back to something resembling pre-crisis norms,” said Greenwich Associates consultant Don Raftery.

About 60% of the small businesses participating have applied for credit in the past 12 months. Of those that applied, about 60% were approved. By way of comparison, about 64% of the middle market companies applied for credit last year and approximately 70% of applicants were approved. “Both loan demand and application approval rates are always higher among middle market companies, which are better established and generally rank as much stronger candidates than small businesses,” said Greenwich Associates consultant Pete Garrison. “But for the first time in at least two years, the numbers for small business – both in terms of the approval rate and the overall share of small businesses borrowing – are in line with historic averages.”

Surge in Loan Demand

The steady increase in the share of small businesses applying for loans over the past three quarters represents a strong vote of confidence in both bank credit markets and in the economic recovery. The results of the Greenwich Market Pulse study show that the share of small businesses applying for a loan nearly tripled from approximately 5% in 3Q10 to 15% in 4Q10, and then almost doubled again to 29% in 1Q11. That final share of 29% actually exceeds the share of middle market companies that applied for bank credit in 1Q11. In that quarter, 27% of middle market companies applied for bank loans, up from 16% in 4Q10 and 9% in 2Q10.

“It’s possible that the late spring and early summer of 2010 will be seen as the trough of the small business credit cycle,” said Greenwich Associates consultant Larry Baily. “At that point, few small businesses had enough confidence in the economy to be thinking about expansion, and among those that were, many had written off bank loans as a source of funding after repeated denials. Small businesses were turning to credit cards and personal loans for working capital. The new research results suggest that from that point forward, the share of small businesses applying for bank loans started increasing rapidly.”

Shifting Relationships

According to the Greenwich Market Pulse results, about half the small businesses and middle market companies that obtained bank credit over the past year borrowed from a lender outside the top 20 banks in the US. The movement of some small businesses and middle market companies to regional and community banks last year reflects a trend: as the nation’s biggest banks recapitalised and adjusted their business models for the post-crisis era, they reassessed how they were committing their balance sheets. These large banks often did not work to retain dissatisfied small business and middle market banking customers, and in some cases banks actually severed relationships.

“At the same time, some creditworthy small businesses and middle market companies probably took the opportunity to shift their business to smaller banks they see as providing better and more reliable service,” said Greenwich Associates consultant Duncan Banfield.


Related reading