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Bullish Small Business Owners Need One Thing to Spark the Economy -- a Loan

Did small business owners fare better or worse than most Americans during the financial crisis? Both, according to a new Federal Reserve survey that examines the impact of the crash on household wealth.

Between 2007 and 2009, 57 percent of these owners saw their net worth fall by the equivalent of at least six months' worth of income. That compares with 43 percent of the overall population who saw their wealth drop by that much. But many small businesses, which the Fed defines as those with a maximum of 500 employees, also flourished during that period. Some 25 percent of these owners saw a large increase in wealth, exceeding the gains made by non-business owners in the public at large (click on adjoining chart to expand).

And here's a hopeful, if somewhat counterintuitive, sign for the U.S. economy: The Fed data also shows substantial demand for credit by business owners throughout the crisis -- whether they were getting richer or poorer. Some 56 percent of small businesses whose wealth had grown during the two-year period in question applied for a loan. But what is more surprising is that fully 53 percent of owners whose net worth decreased also tried to get a loan.

Of course, not many of these firms have succeeded in getting credit. But that has less to do with sagging demand for small business loans, as many financial executives contend, than with bankers hoarding their cash. As Fed Governor Elizabeth Duke said in a speech this week on the impact of the financial crisis:

[T]he striking similarity in credit approval rates for business loan requests by business owners who gained and those who lost wealth would seem to support anecdotal reports at the time -- that business credit was hard to obtain even for good borrowers.
Why is that good news? Because while the credit environment remains tight, lots of small businesses have clearly continued trying to borrow throughout the downturn in expectation of future growth. All they need is a loan.

Young guns: Ready for action
Here's another important sign that the economy is slowly recovering. In January, more banks reported increased demand for loans by small firms than decreased demand, the first time that's happened since early 2006. In other words, small businesses are modestly, but noticeably, more bullish about the future.

Better yet, the most optimistic businesses appear to be the youngest ones, according to the Atlanta Federal Reserve Bank's latest small business lending survey:

Young firms were more likely to indicate they were seeking credit to expand their business. Also, significantly larger net percents of young firms anticipate increases to employees, sales, and capital expenditures over the next six to 12 months. In fact, none of the young firms indicated they anticipated decreases to the number of employees in their firm over the next six to 12 months.
That's important because new companies create lots of jobs. And it underscores how critically important it is that these firms get the credit they so clearly need. As with other small business owners, younger entrepreneurs are increasingly confident about their economic prospects even as they continue struggling to get a loan. Let's hope banks soon give them another reason to smile.

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