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The Small Business Credit Environment

The NFIB Research Foundation released a report this month titled Small Business Credit In A Deep Recession. The report presented relevant data obtained from a random sample of 751 interviews of small business owners (small business was defined as businesses with 1 - 250 employees) pertaining to small business credit access.The interviews were conducted from mid-November to mid-December 2009.  Some of the findings of the study were as follows:

 - 55% of small businesses attempted to borrow in 2009, with 40% of those having all of their credit needs met. 10% had most of their needs met and 21% had some of their needs met. 23% were unsuccessful in getting any of their credit needs met. The most common planned purpose for rejected credit was to fill cash flow needs.

 - In 2009, these least difficult type of credit to obtain was a credit card (73% successful) while a new credit line was the most difficult type of credit to obtain (38% successful).

 - The best predictors of success in meeting credit needs were: higher credit scores, customers of banks with less than $100 billion in assets, more properties collateralized for business purposes, and fewer second mortgages held.

According to The Wall Street Journal, the FDIC recently reported that in 2009, U.S. banks recorded their sharpest decline in total loans outstanding since 1942. Also, the number of U.S. banks at risk of failing hit a 16-year high of 702 and more than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. The FDIC expects these problems to last through 2010.

So will the small business credit enviornment significantly improve anytime soon? Probably not. But that doesn't mean it is impossible for small businesses to obtain credit. The NFIB study indicated that small businesses were having greater success in satisfying their credit needs at smaller banks as opposed to the 18 largest institutions in the country. This may be a result of the more personal relationship the smaller banks have with their customers and personal knowledge of their businesses as opposed to the large banks' credit scoring models. If the President's proposed Small Business Lending Fund legislation is enacted, the credit opportunities at the smaller banks could improve even more.

If in the market for new credit in 2010, small business owners should first develop a quality relationship with their banker before the new credit is needed. Meet them in person, explain to them what you do, where you are going, and how you are going to get there. Show your enthusiasm regarding the prospects for your business. When it comes time to request the new credit, be prepared! Know how much credit you need, what it will be used for, and how and when  it will be paid back. Credit will be available, the key is positioning the business to be successful with its request . A solid business plan coupled with a little advanced preparation can make obtaining new credit in 2010 a reality.


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