While the economy is showing signs of life, many small businesses still have a tough time getting banks to lend them money. In fact, half of small businesses say that it is harder to obtain credit than it was a year ago, including 33% that say it is much harder, according to Greenwich Associates' most recent quarterly survey. Just 15% of the small businesses say credit conditions have improved.

The Greenwich survey, conducted in October, shows that while midsize companies enjoy somewhat better credit access than small firms, 35% of them say credit is harder to come by and only 25% say it has gotten easier to get a bank loan.

Some 60% of middle-market companies say they're worried about getting the funds they need to run their business this year, as do 70% of small businesses.

“A very key finding is that companies are getting the message and they're much more often saying that they're planning not to rely on bank loans in 2011,” says Chris McDonnell, a consultant at Greenwich. “They are planning to operate based on their own cash flows, but they're not necessarily sure it's going to work.”

The credit scarcity is a negative sign for the economic growth overall, McDonnell says, since small firms typically play a big part in getting the economy going again after a recession.

“The small businesses are having a hard time getting their hands on capital, they're not growing, business is slow,” he says. “It really appears that the key to pulling out of the recessionary period is not going to come from them.”

Certainly respondents at small and middle-market companies are pessimistic about the economy. Thirty-five percent of small firms and about a quarter of midsize companies expect the economy to deteriorate in the next six months. Just 15% of small firms and 20% of middle-market companies are predicting that growth will pick up.

Meanwhile, Greenwich says large companies have “ample access” to credit at this point, both from banks and via the bond market. Large companies are almost back to the level of credit access they had prior to the financial crisis, McDonnell says. “The banks are being pressured to loan money, and doing so with large companies enables them to loan large amounts of money to lower-risk institutions.”

To read about how the end of Reg Q could change the business banking market, see Reg Q Wipeout.

Instant Insights /

Credit Harder to Come By

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