Is the Small Business Credit Crunch Really Over?

Reports from financial institutions indicate that bankers have loosened their purse strings in response to widespread complaints that they weren't lending to small businesses. If you believe one survey by Capital One, 85 percent of small businesses said in the first quarter of 2011 that they could get all the financing they needed.

Some observers, like this one at Fox Business, are buying the banks' claims. But, while it's likely that small business lending has improved somewhat, it's also likely that the much-criticized, much bailed-out banks are squeezing all the good press they can legitimately get out of the development, and perhaps even a little bit more.

If you check out the Thomson Reuters/Paynet Small Business Lending Index, which looks at the net volume of small businesses loans normalized to the level in 2005, you find that small business lending is still at just 85 percent of the 2005 level. It's far below its 2006 peak of more than 130 percent of the starting point, and just 20 percentage points above the mid-2009 trough.

So how can it be that small business lenders are gratifying the needs of almost all businesses? A Connecticut advocacy group says they're not and that that one lender, Bank of America, is cheating on its reports about small business lending. The group, Connecticut Action Alliance for a Fair Economy, says that BofA is including loans of businesses with up to $50 million in sales in its reports on small business lending. Instead of loaning to truly small businesses, the group says, the bank is pushing the owners toward high-interest credit cards as a financing solution. A bank spokesman called the charges "baseless."

Another non-profit on the other side of the country says that, despite the rosy news ginned out by financial sector press release mills, small business lending was down sharply through the end of last year. Economic Fairness Oregon issued an analysis of SBA loans made by big banks that stated that Bank of America, for instance, made just six small-business loans in the state in 2010, down from 77 in 2007.

To a business owner pondering how to finance the purchase of a new machine or open a new location, it's tempting to grasp at the straw-like idea that big banks have suddenly opened their coffers to small borrowers. But before hiring the employees who will operate that machine or staff that new office, it's a very good idea to read all the news about small business lending. Because what the banks would like us to believe may not be something you can take to the bank.

Mark Henricks is an Austin, Texas, freelance journalist whose reporting on business, technology and other topics has appeared in The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications. Learn more about him at The Article Authority. Follow him on Twitter @bizmyths.

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