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Small Business Lending Slowed in 2002, 2003

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March 22, 2005 --The pace of borrowing and lending in the small business loans market slowed between June 2002 and 2003, according to a new report from the Small Business Administration, but since then demand from small businesses has improved.

"There has been an increase in demand for loans, which is reflected in the January 2005 Senior Loan Officer Opinion Survey," said Brian Headd, an economist at the SBA.

The Senior Loan Officer Opinion Survey on bank lending practices examines quarterly changes in the supply of, and demand for, bank loans to businesses and households. The most recent survey indicated that almost 30% of banks reported increased demand.

The SBA's report, which summarizes data from June 2002 to June 2003, showed that the volume in micro-business lending over the period dropped 10%, from 15.7 million loans to 14.1 million.

The value of outstanding loans dropped 2.5%. At the same time, the demand and supply of bank loans showed moderate increases in 2002 and the first half of 2003.

The plunge in micro-business lending is in sharp contrast to rise of 45% during the previous period.

The SBA said that revisions in the reporting methodology of several major credit card banks created an appearance of slower growth, even while the pace of lending has picked up.

Several banks switched from reporting the number of "total accounts" to the number of "active accounts." The total number of loans outstanding reported by major credit card banks declined by more than 30% from June 2002 to June 2003.

The smallest loans showed the least activity, but larger small business loans ( $250,000 to $1 million) were not significantly better, shrinking by 4.7 % in 2003, compared with 7.0 %, in the June 2001 to June -2002 period. The smallest loans -- those between $100,000 and $250,000 -- fell 2.3% in the latest report, compared to 4.9% in the previous period.

The run up to the Iraq war had its effects on lending, as many borrowers and lenders held off on getting small business loans. The slowdown continued from the second half of 2003 through the first half of 2003, after which the market saw a moderate increase in demand for loans.

The report also showed an increase in the number of large banks providing loans to small businesses.

In June 2003, the 67 largest banks and bank holding companies accounted for nearly 75% of total banking assets in the U.S. They provided nearly 65% of small business loans, up from 46.4% in 2002 This growing share is likely the result of these banks' efforts to market small business credit cards, said the SBA.

Last updated: Mar 22, 2005




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