John Tozzi joins Mike Siegel to discuss business credit and the recent NY Fed survey showing the credit gap for small businesses. John wrote in a recent Businessweek article "Small businesses in the New York area show “unabated demand” for loans and “widespread reports of unmet credit needs,” according to a new survey by the Federal Reserve Bank of New York. Of the 59 percent of businesses responding to the poll that applied for credit in the first half of 2010, only half got any loan approval at all, and three quarters said their full borrowing needs were not met." see www.Businessweek.com for the full article.

Mike Siegel interviews John Tozzi for the Boss Business Brief to discuss the article, the NY Fed study, and what it means for small businesses.

Transcript:

Siegel: Well folks, welcome in. Good to have you with us right here at the BOSS Business Brief. We want to talk about small business and the situation regarding credit, which is a huge question for small business in this country. This down turn that started a couple of years ago and has been a real burden on the backs of small business particularly. You know, we bailed out the major institutions, and of course that is fine and dandy. I suppose some people believe that was a good idea, others don't, but nevertheless they got taken care of and small business did not. John Tozzi of Bloomberg Business Week, he did a piece a couple of weeks ago about this credit gap, particularly talking about New York but I would extrapolate that perhaps it is the same problem across the country. Good to have him on the program. John, thanks for being with us and how are you doing today?
John: Good thanks. Thanks for having me.
Siegel: It's a pleasure. Let's talk about this survey that was done in the New York area, as well as I think some other states in the region. But this whole issue for a credit gap for small business, what is that all about?
John: Sure. Well, this is a survey that the Federal Reserve Bank of New York did over the summer of about 400 businesses in the New York metro area. One of the things they were looking to address was this question we have had throughout the recession which is whether there really is a credit gap for small businesses; whether there are businesses out there that are credit worthy, that want loans that cannot get them. So, the evidence suggests that there were absolutely businesses looking for credit that are not having their credit needs met, that are not getting those loans.
Siegel: And that has been a huge part of our problem. I have talked on conversations previously here about how small business has basically been taking it in the shorts, because the focus has been on the major institutions, the institutions that we cannot "allow to fail" so to speak, and small business really is the driving engine of the American economy. Many would argue at least 70% of the American economy, perhaps more, probably more as a matter of fact. So, what we have here is small business not getting the kind of support that it needs, and I am talking nationally, in order to do what it does best, which is to create productivity. Is this gap that you are talking about, that they actually found is a problem, that credit worthy small businesses are not getting the loans that they need. How much of a problem is that in terms of the overall economy of the region where this study was done?
John: Well, it is hard to tell exactly how much this contributes to what you are saying in the broader economy. I think that small businesses are generally considered to be about half of private, non farm gross domestic product. So, they are, as you noted, major job creators, about 65% of net new jobs are attributed to small businesses. So, in that sense, if they are credit constricted or if they are lacking the economic recovery, in general that is going to have consequences for the entire economy, not just the small business sector.
Siegel: There is no question about that. That was my point, I guess, in terms of the job creation, which to me is what the productivity is about, because I think, again, most would agree that the issue of unemployment and jobs is the biggest issue we face in this country. Is that not the case at the moment?

John: Absolutely. I think that I why over the past really year or longer you have seen a lot of attention to this issue. With this survey that we reported on what it does is just really add some useful data points to this question that there has not been a lot of good data. It is hard for policy makers to really sort of make decisions or judgments around this because on a basic level they don't have sort of the numbers and research they need to kind of really understand what is going on with these small, privately held companies and their access to loans and other forms of credit.
Siegel: I have talked to many small businesses, and I am not just talking about in the New York area, and again I will say that perhaps this survey is symbolic of a bigger problem in terms of that credit gap because there are businesses that I have talked to that are very credit worthy and that number (1) are not getting the loans that they should be getting based on their credit or number (2) some of them don't even want the loans at this point because they are fearful about where this economy is. How much of that plays into this in terms of the uncertainty of where the economy is and the uncertainty of federal monetary policy, as well as what congress is going to do about the Bush tax cuts?
John: Well, this particular study I don't think addressed that question of uncertainty. Of the businesses that responded to the survey, a little less than one-third, about 29%, did not even seek credit. So, that gives you some kind of sense of what the demand is in the sample. Of those that applied, about a little more than half, I believe, were successful in getting some form of credit. Now, that might mean they went to get a working capital credit line and the bank came back and offered them a credit card with a much higher interest rate and much less favorable terms. So, the percentage that actually had all their credit requests met in the sample was much lower than that.
Siegel: Of course, when you make the point that 29% did not even apply for loans or were not interested, I wonder how many of that 29% would actually have done so if they believed the economy was on a good path with greater certainty about monetary policy and congressional policy and they would have been more comfortable making those loans. You might have had a substantial portion of that 29% interested in borrowing money.
John: It is possible. That is something that this did not really address. One of the conclusions that the New York Fed researchers did come to is that for firms that were seeking credit, some of the successful…you know, the factors for the success that helped them obtain the loans they were seeking were….you know, the firms were more established, older, that they had positive sales growth, and that they had earnings from previous years that they could use as financing. So, what is kind of paradoxical is that those may be the firms that are, you know, not in need of credit as much as perhaps the borrowers that are in more of a cash crunch at the moment.
Siegel: We are talking with John Tozzi of Businessweek. Then, this raises the question about where we are going from here. I think most would agree that the availability of credit was there for the major institutions that so-called could not be allowed to fail, but that the money was not available for credit-worthy small businesses for some period of time. I know myself from FDIC policy, they looked very askance at some of the small business loans that community banks had out there. I interviewed one of the spokespeople at the FDIC about that very question and they said they might change that policy when the economy seemed on more solid footing. Is this an indicator that the Fed is looking at the notion that we ought to be more open to small business loans as a matter of federal policy? What was the intent of that survey and what can we expect coming out of it?
John: I think a lot of people at the Fed Bank and throughout the government are focusing on this issue. You have heard the president talk about it several times in the past year. Because small businesses are really seen as the key to job creation. One of the things going forward with this particular research that might help is kind of for banks to consider borrowers that might not fit sort of their underwriting that they have been using during the recession when credit was very tight and that there are perhaps healthy borrowers that would benefit from what some banks would call second look programs that are rejected on the first try. These would get sort of additional….that, you know, a loan officer would look at the loan application and see if they quality for some kind of loan and that maybe those businesses that could be paired with technical assistance so that the business owner would actually get help in running their business, managing their cash flow, all those things so that they would be in a better position to repay those loans. I think you're right in that there are certainly a lot of consternation that, it appears anyway, that banks were bailed out and then that they have not turned around to lend to Main Street. There are obviously a lot of business owners upset about that. But, you know, banks are also responsible for making responsible loans and they have been under a lot of pressure from regulators to reduce their risk. I think we are beginning to see some of that ease. So, hopefully the recommendations in the report may help more business owners get loans going forward.
Siegel: That was the point of my question, a very important point, but you know it is kind of ironic. Some of those banks, there was some talk about Bank of America and Citibank, that they might not even be here today without federal money, tax payer money. So, it would seem to me that they have to be responsible but on the other hand you could make the same argument that if they didn't get help and get bailed out, they wouldn't exist. So, the small business sector, as you pointed out, is the major force for creating new jobs, in my view at least, should have been all along in a responsible way given the opportunity to do what it does best, which is to be productive. I hope that what you are suggesting, John, is that there will be an opening up of that policy as a result of these kinds of surveys. Are you seeing that generally in your own look at this across the country in your own research? Does it appear that there is greatest interest now in making loans available to small business?
John: It is funny. When you speak to people at the big banks, for the past year many of them have been saying that they can't find enough credit worthy borrowers to make loans. That they would love to be making more small business loans, but that the applicants that are seeking them are just not good credit risk. I think that is a legitimate concern; that the healthiest firms maybe aren't looking to borrow and that the firms that are looking to borrow are not necessarily good credit risk. So, that is a real question for the banks. That said, I think the latest survey of loan officers, the Fed surveys senior loan officers at banks every quarter, and the latest one did show some movement toward easing credit standards for small firms. I think you have to look at the loan numbers, but I think we are not beginning really to see that, that credit is still declining gin terms of the numbers of loans outstanding and business owners are still in some ways sort of de leveraging. But I think a lot of people are going to be looking for when that does turn around and that there really is a credit expansion in the small business sector.
Siegel: Well, hopefully your piece and some of the things that have been happening at the Fed might help to do that, to open up those small business loans. I guess the one thing we could say to small business owners listening out there is they should certainly go back to their banks that they have been dealing with, for what you talked about earlier which is that "second look." Shouldn't they begin to do that now as well?
John: I think it is probably a good strategy, if you are in a situation for business owners that are looking for credit, if they are rejected on the first application, to go back to your banker, your loan officer, and see if the bank does have the "second look" program. Some banks have been very public saying they are going to do second looks for business owners. So, it is worth reviewing, or at least going back to make sure you have a good explanation from the bank of why your business was rejected.
Siegel: Well, great point and great comment from your piece – businessweek.com. Thank you very much, John Tozzi. Appreciate your time and hopefully small business will see the light at the end of the tunnel and be the focus of lenders for their ability to borrow money. Thank you so much for being with us today.