The national banks that survived the financial crisis did not escape without damaging their reputation. Media reports and public opinion often criticize these institutions for putting the financial system at risk. From this perspective, it’s tempting to blame overly tight lending standards for the weak recovery in small business lending. But what is really keeping business lending down? I believe restricted accesses to credit and depressed appetite for debt are both at play. Neither banks’ nor businesses’ conservatism tells the whole story.
U.S. banks have generally tightened lending standards and reduced existing credit lines on many business credit card accounts since the recession. But businesses’ appetite for credit is also quite subdued. Many businesses owners expect growth in revenue and net income to be very challenging; some even think the U.S. is still in a recession. It is not surprising then, that many businesses are refraining from expanding production, hiring new employees, or raising capital.
Issuers of small business credit cards, a very important source of capital for these businesses, are doing fairly well. Spending on these products continues to grow despite business owners’ aversion to debt. This is similar to the way today’s consumers are using their credit cards. Issuers are likely encouraged that purchase volumes on both products are growing, although account formation and outstandings aren’t budging. There is plenty of opportunity for all metrics to improve, driven by shifting preferences in favor of electronic payments and issuers continued development of applications to support their card products – not to mention the billions of dollars in business purchases that are charged to consumer credit products.
Mercator Advisory Group’s December 2013 report titled Business Credit Cards: Whetting Business Owners’ Appetite for Borrowing
details the variety of factors at play in the small business lending environment, and reviews business card product development among several major U.S. issuers.