NFIB's Monitoring of the Credit Markets

NFIB is out with an updated report on the state of small business credit as of the end of 2010. This is probably the most important annual report on small business credit that's produced in the United States right now because the Federal government doesn't have any meaningful ongoing monitoring of small business credit, a topic I have an editorial on in the forthcoming American Statistical Association magazine for February 2011. NFIB's current report is notable on many topics but I wanted to highlight a few that might be lost in their importance.

  • Forty-eight percent of small businesses attempted to borrow funds in 2010 while 3 percent of small business reported attempting to raise equity capital.

    Measuring attempts to get equity investments is very difficult and indeed we worked with NFIB on this question in their current survey. So, here I think it's important to recognize the sheer magnitude of difference between those who seek debt rather than equity in a given year but also to realize that this 3 percent estimate is very imperfect. In my own opinion, equity investment questions are particularly open to differential reporting when asked in the very aggregate rather than by very specific categories/relationships.

  • "Almost one-quarter (24%) of small employers currently use credit cards and no other bank credit source. The overwhelming majority of this group does not appear interested in obtaining more credit."

    The U.S. seems to be uniquely placed among countries in the proportion of small businesses using mainly credit cards for financing. I am not surprised by these statistics but I thought their second conclusion that for a very specific group of business owners, credit cards are all that is needed and they are not seeking additional financing.

  • The percentage of small employers applying for credit fell from 55 percent in 2009 to 48 percent in 2010. The percentage approved for credit rose somewhat, leaving about the same number accessing credit in 2010 as accessed it in 2009.

    This is why these types of questions are important in a time series. Even though the same number of businesses appeared to get credit there was a large shift in those applying.

  • If an application for a line or a loan is rejected, it pays small business owners to try at a second or third institution. While the success rate declines with each successive institution approached, approvals appear high enough at fallback institutions to warrant the effort. Beyond attempts at three institutions, success appears rare. Cards are different. Ninety-five (95) percent of applicants got one on the first attempt or did not get one at all.

This last point was interesting, I thought particularly for small business owners. I don't know of another place that gathers information quite like this.

Original Post 6/10/2009

Today, Kauffman is hosting a conference in New York discussing, "Financing the Entrepreneurial Recovery." Although I am not attending, I thought it would be helpful to highlight the topic of finance and survey questions and some example survey questions which are being used by the National Federation of Independent Businesses (NFIB) to track small business financial conditions. Let us start with an extract from June 2009 Small Business Economic Trends on the credit markets:

Overall, loan demand is down due to widespread postponement of investment in inventories and historically low plans for capital spending. Cash conservation is a top priority in uncertain times. In addition, the credit worthiness of many potential borrowers has deteriorated in the recession, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards). Twenty-eight (28) percent reported all their borrowing needs met (down two points) compared to nine percent who reported problems obtaining desired financing (up one point; not seasonally adjusted). The net percent reporting all borrowing needs satisfied fell 3 points to 19 percent. The percent of owners reporting loans harder to get rose to 16 percent of all firms, the highest reading since the 1980-82 recession period. So, it appears that as the recession drags on, financing becomes more difficult to arrange. But only 5 percent of the owners reported “finance” as their #1 business problem, up a point from April, but statistically unchanged for years. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 15 percent (more owners expect that it will be “harder” to arrange financing), 3 points worse than the April reading.

While the actual results here are very interesting and nuanced, let's turn to the questions used to gather this information. I am very thankful to Denny Dennis at NFIB who was nice enough to pull these questions for me for some research we are doing for an upcoming OECD-Kauffman workshop.

18. If you borrow money regularly (at least once every three months) as part of your business activity, how does the rate of interest payable on your most recent loan compare with that paid three months ago? 1. Much higher 2. Higher 3. Same 4. Much lower 5. Lower 7. Inapplicable, do not borrow regularly     

18a. Are these loans easier or harder to get than they were three months ago? 1. Easier 2. Same 3. Harder 4. Don't know

18b. Do you expect to find it easier or harder to obtain your required financing during the next three months? 1. Easier 2. Same 3. Harder 4. Don't know

I like this set of questions but did want to point out that there are only a few small businesses which regularly enough, borrow money to answer this question. I looked quickly at a similar question we asked of the Kauffman Firm Survey population (new businesses in 2004) and found only about 12 percent reported applying for new or renewed loans or lines of credit in calendar year 2007. I don't see in the report the percentage of all small businesses which actually applied in the last three months but have to imagine it is biased towards the bigger firms in the sample.

19. If you borrowed within the last three months for business purposes and the loan maturity was 1 year or less, what interest rate did you pay? __________ % or Prime + ___________

This question appears to show a real drop in interest rates paid relative to previous years which would seem to make sense. The wording to this question would seem to capture a larger share of firms.

20. During the last 3 months was your firm able to satisfy its borrowing needs? 1. Yes 2. No 3. Did not want to borrow

We asked a similar question in the Kauffman Firm Survey this year but worded differently, "During calendar year 2007, was there any time when [NAME BUSINESS] needed credit, but did not apply because you or others associated with [NAME BUSINESS] thought the application would be denied?" The two questions actually look at slightly different things, satisfaction of borrowing needs vs. needing credit but not applying. It'd be interesting to understand how firms interpreted both questions. On a quick read, NFIB's question seems broader and worded in a way which I suspect respondent firms would respond better.

25. Compared to three months ago: c. Is trade credit, that supplier financing of purchases: 1. Easier to get 2. Harder to get 3. No change 4. Never use trade credit

I don't know much about trade credit but have heard this reported in Europe as a real issue of concern.

3. What is the single most important problem facing your business today? (Please circle only ONE of the following.) 4. Financing & interest rates

Interestingly, this question peaked in mid-2008 and now remains quite low in comparison to other options (namely sales). Their response category for this set of questions appears fairly complete and has shown some huge movements in the last year or two.

7. Were your net earnings or "income" (after taxes) from your business during the last calendar quarter higher, lower or about the same as they were for the quarter before?

7a. If higher or lower, what is the most important reason? (Circle only ONE.) 6. Financing costs.

Wow. This is such a diverse array of questions with seemingly something for everyone. Unfortunately, NFIB doesn't go back to the same firms over time so we can only get these index types of questions. It'd be great for research purposes if they were able to do more of a longitudinal sample if only for a year.

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