One of the conundrums of lending world is two incompatible accounts of statistics told by banks and regulators. Banks offer statistics that small business lending has improved compared to previous fiscal quarters. However, regulators – notably the Federal Reserve without disputing the numbers put out by banks – has been asserting lending to small businesses has declined. Now, the conundrum is how could small business lending be increasing and declining concurrently? This paradox has a rather simple answer.
SOPHISTICATED YET SIMPLE ANSWER
Banks have a vested interest to analyze data and present them favorably to the public. As such, banks have found a way to look at the facts and present them as they are returning the American graciousness for bailing them out by improving lending to small businesses. In fact, banks, in their calculations only analyze new or renewed loans made in a particular quarter and compare the data with previous ones.
On the other hand, regulators, notably the Federal Reserve, consider ALL of outstanding loans out there, in their calculations, regardless of whether they are new, old or renewed ones. This means given the volatile financial climate we are painfully witnessing businesses with old loans either cannot pay or are so scared that they are paying them off, if they can. Hence, in either scenario the overall outstanding balances in the financial market declines as people are either defaulting or paying off and while new loans are not enough to offset such decline and even boost the overall lending.
Note, paying off loans is a noble objective. The problem is such businesses while paying off their old loans are neither qualified to obtain new ones with better terms nor dare applying for new ones since they are scared of the prevailing economic uncertainty. Accordingly, such small businesses (with less than $20 million in earnings) do not grow and do not create jobs.
THE IMPORTANT QUESTION
The salient question is when will new loans offset the declining overall credit market in the US? This means when do the number of people obtaining loans surpass the total number of people defaulting or paying off their business loans? The answer depends mostly on job market and consumer spending. Until consumers feel they can spend knowing they can keep their jobs or get new ones and businesses become confident if they borrow they can pay it off, we won’t witness any palpable recovery in the marketplace accompanied with sizable and substantive lending to small businesses. The reason is banks are still scared to loan fearing their money won’t be repaid with such egregious unemployment and low consumer sentiment. At the end, it is, indeed, a vicious circle, if you do not spend and hire, the economy won’t improve; however, how could you hire when you cannot obtain loans to grow and are so scared of the volatile economic marketplace?