Small Business Credit Squeeze Caused by Multitude of Factors, Says New Cleveland Fed Study

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Small business lending has declined substantially since the Great Recession, and a multitude of factors are contributing to the credit squeeze, according to Federal Reserve Bank of Cleveland policy analyst Ann Marie Wiersch and visiting scholar Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University.

Policymakers may want to intervene to ensure that small business owners can access the credit they need. But any proposed solution needs to take into account all of the many factors affecting small business credit.

Small business lending has declined substantially since the Great Recession, and a multitude of factors are contributing to the credit squeeze, according to Federal Reserve Bank of Cleveland policy analyst Ann Marie Wiersch and visiting scholar Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University.

According to the researchers:

  •     Fewer small businesses are interested in borrowing due to soft demand for their products and services
  •     Small business financials have remained weak, depressing loan approval rates
  •     Declining real estate prices have lowered collateral values, limiting the amount that small business owners can borrow
  •     Increased regulatory scrutiny has caused banks to tighten lending standards, lowering the fraction of creditworthy borrowers
  •     Banking industry consolidation has reduced the number of small banks, which are more likely to lend to small businesses
  •     And small business lending has become relatively less profitable than other types of lending, reducing bankers’ interest in this market

Wiersch and Shane say this confluence of events makes it unlikely that small business credit will spontaneously increase anytime soon. Given the contribution that small businesses make to employment and economic activity, they suggest policymakers may want to intervene to ensure that small business owners can access the credit they need. But the researchers caution that any proposed solution needs to take into account all of the factors affecting small business credit.

For a brief overview of their study, see Still Squeezed: Small Business Lending.                

For more detail, read Why Small Business Lending Isn’t What It Used to Be.

And be sure to check out our other recent research.

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