Demand for small-business loans slows

October 30, 2011 at 12:00a.m.

Mike Herd, owner of Gable Integrated Services in Troy, Mich., said he’d like to take out a small-business loan so he’d have money to cover production costs of bigger orders as they come in to his business.

He has had plenty of bankers come talk to him.

But the money is very tight and the going has been slow, Herd said. He said the hang-up is that many banks likely do not want his building as collateral.

“I’m sure their position is they don’t need any real estate, but that’s what I have,” Herd said.

The demand for new loans for small-business owners has a lot to do with whether the owners expect business to grow and, ultimately, whether they could qualify for a loan under tight lending standards.

Eight out of 10 small-business owners say they probably will not or definitely not take out a new loan or line of credit in the next six months, according to a PNC Economic Outlook Survey.

That represents the lowest demand in the history of the survey, which dates to 2003.

Kurt Rankin, economist for the PNC Financial Services Group in Pittsburgh, isn’t surprised by the low demand for small-business loans.

“Both business and consumers realize that debt was such a big part of what threw us into the recession in the first place,” Rankin said.

He noted that home equity loans fueled much borrowing. But after home prices tumbled, consumers could not borrow as much, if at all, by tapping into home equity.

Consumers realize that taking on new debt is tougher, and so do many small-business owners.

Many small-business owners are wary of the outlook for the U.S. economy — with nearly half of those surveyed in the PNC Economic Outlook Survey saying they expect the Standard & Poor’s downgrade of the U.S. Treasury to hurt their own businesses.

Overall, consumer confidence had been falling before S&P downgraded U.S. government debt Aug. 5. S&P cut the long-term U.S. credit rating by one notch, to AA+, citing concerns about growing budget deficits.

To be certain, interest rates surprisingly did not climb after the S&P downgrade of U.S. sovereign debt; rates actually fell.

The “flight to quality” drove down rates on U.S. Treasuries because investors feared that the stock market and other investments were becoming much riskier.

Even so, Rankin noted that if U.S. borrowing costs eventually do rise, that would mean higher rates for small-business owners.

Consumer demand remains low, so rising costs of any kind can be hard on a small business, he said.

If small-business owners do not see business picking up, they’re not going to hire new workers.

“The main issue for small business is simply demand,” Rankin said. “While business can reach [more customers] with the Internet, there’s no buying. It’s very much a demand story at this point.”

Until business picks up, Rankin said, small-business owners likely will continue holding back from hiring or expanding.

The survey noted that only 14 percent of businesses say that providing significant federal tax incentives would encourage their business to hire new employees.

The response was to a general question regarding business owners’ expectations, if the government provided significant tax incentives for hiring. The question did not reference President Barack Obama’s plan or any other specific plan.

Small-business owners’ expectations for sales and profits are significantly lower than they were last spring — ushering renewed pessimism compared with six months ago, according to the survey.

Rankin said it is not a matter of the federal government providing more incentives; instead, businesses need to see enough demand to warrant new hiring.

What is needed, he said, is a stable foundation of demand for products and services.

The PNC Economic Outlook Survey indicated that four out of five U.S. small-business owners would maintain or reduce their number of full-time employees during the next six months.

Not everyone is gloomy.

The mood brightens somewhat in the fourth quarter this year, as three out of 10 owners expect higher profits during the holiday season, when compared with a year ago, according to the survey. But 41 percent see no change in profits, and 29 percent expect a decline.

Detroit Free Press