Small business lending back to pre-crash levels

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(Moneywatch) Small businesses have struggled to get loans ever since lenders tightened credit after the economy collapsed in 2008. But that appears to be changing, offering hope that smaller employers -- which create most of the country's new jobs -- may have an easier time hiring again.

Bank lending to smaller employers is back to its pre-crash level, according to industry data. The Thomson Reuters/PayNet Small Business Lending Index rose to 108.3 in November, up from a downwardly revised 107 in October and a huge step up from September's 14-month low of 94.1. (100 on the index equals the rate of lending at the start of 2005.)

The Biz2Credit Small Business Lending Index also showed that loan approvals by big banks, which had sharply reduced their lending to smaller companies, are at their highest rate in two years. In December, large financial institutions approved 14.9 percent of small business loans, a 6 percentage point increase over December 2011.

Bank are "under a lot of pressure to start lending to make money," said Biz2Credit CEO Rohit Arora. "Because of Dodd-Frank, a lot of banks cannot make money on the retail side of the business. So retail is a loss-leader for them and they have to make money on the business side."

Arora cites a recent study showing that, because Dodd-Frank has capped many of the service fees that lenders charge, banks lose money on people who maintain less than $100,000 in their checking account. "Business owners typically maintain much higher amounts in checking accounts than the ordinary customer," he said.

Despite signs that banks are loosening the purse strings for small businesses, smaller employers themselves still appear anxious about the economy, which continues to show only middling growth. A National Federation of Independent Businesses index that gauges small business optimism rose 0.5 point in December to 88.0. That would have been a positive sign if it hadn't come on the heels of a 5.6-point plunge in November, one of the largest declines ever for the index..

Similarly, while PayNet's November loan approval numbers were up, they were still slightly below their level at the start of the year.

Arora attributes that seeming disparity to industry group working with different sets of data. "One of things we have seen over the last two years is that [Biz2Credit] has been more of a leading indicator than a lagging indicator because our index is not-survey based," he said. "It's based on the actual loan application and the actual intel we pull from business owners, which banks are lending and who is approving it."

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