Lending to U.S. small businesses fell in the third quarter, showing the companies that account for more than half of total job creation are still struggling to emerge from the recession.
Net borrowing by non-financial non-corporate businesses shrank by $162.7 billion at an annual rate from July through September, the seventh consecutive quarterly decrease, according to the Federal Reserve’s Flow of Funds report released today in Washington. Still, it was the smallest drop of the contraction in lending that began in the first three months of 2009.
Small companies are “still hurting and working toward healing and not borrowing,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who worked on the report as a Fed economist. “They’re paying down bank loans, they’re paying down mortgages.”
Sales expectations at small businesses turned positive for the first time in five months in October, according to a survey last month by the National Federation of Independent Business, indicating firms may begin expanding in coming months. At the same time, the value of their assets has fallen, making it harder to qualify for loans, Coronado said.
Fed Chairman Ben S. Bernanke has said these companies account for 60 percent of job creation, meaning bigger payroll gains a lower unemployment hinge on their willingness and ability to spend.
Non-financial, non-corporate businesses are firms that are not publicly traded. While they can include large companies, many are small businesses, real-estate investment concerns and construction firms, said Coronado.
Larger firms, meanwhile, are borrowing more from banks to finance investments in new equipment. Corporate borrowing rose by $328.5 billion at an annual pace in the third quarter. While companies had a record $1.93 trillion in cash and other liquid assets, they spent more on plants and equipment, bringing the so-called financing gap to $127.9 billion, the most in at least two years.
“There’s clearly a surge in excess cash flow for the business sector so companies can pay off debt, that’s more true of big companies than small,” said Jim O’Sullivan, global chief economist at MF Global Ltd. in New York.
The Fed’s senior loan officer survey for October showed 12.3 percent of large and mid-market firms said lending standards had eased somewhat, the same as in July and up from 10.7 percent in April, according to a report released Nov. 8. Eleven percent of small firms said standards eased, compared with 14.5 percent in July and 1.9 percent in April.
The Obama administration earlier this year singled out small businesses as a key to faster economic growth. In September, President Barack Obama signed legislation that included $56 billion worth of tax cuts over 12 months and a $30 billion program to boost lending. That was in addition to provisions in the general stimulus plan that funded increased limits on loan guarantees offered by the Small Business Administration.
Banks including Bank of America Corp. and Citigroup Inc. have said they’re increasing their focus on small business lending. Citigroup said Nov. 15 it planned to hire 200 bankers by the end of 2011 to court businesses with less than $20 million of annual sales.
Even so, with consumers still focusing on repairing their balance sheets, it will take a while for small companies to want to increase borrowing, Coronado said.
“There’s not a strong desire to borrow aggressively because activity is still relatively modest,” she said.
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