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Volume 21, Number 1, 2011

Small Businesses Need Big Ideas: The Federal Reserve Examines the Challenges of Small Business Financing

Although the economy is showing clear signs of growth, lending to small businesses remains tight and unemployment remains high. Small businesses play a critical role in job creation, so the issue of small business financing may be critical to understanding why employment is not growing faster.

In "Small Businesses Need Big Ideas: The Federal Reserve Examines the Challenges of Small Business Financing," which appears in the latest issue of Partners in Community and Economic Development, Jessica Farr, Senior Community Development Specialist at the Nashville Branch of the Atlanta Fed, looks at the issues surrounding small business credit access issues. She writes that although small business owners and lenders agree that credit has tightened over recent years, they are less clear about whether it is supply or demand that is driving the tightening.

Farr describes how the Federal Reserve System convened more than 40 regional meetings during 2010 to investigate these credit challenges, gathering lenders, small business technical assistance providers, small business owners, community development financial institutions, and government agencies. She writes that comments coming out of these meetings fall into four general areas:

  • Tighter bank underwriting standards have made it more challenging to obtain financing.
  • Banks have fewer resources for new lending as they struggle to manage problem loans and toxic assets on their books.
  • Heightened regulatory scrutiny, whether real or perceived, and increased capital requirements may have made some financial institutions more reluctant to issue new or higher-risk loans.
  • Small businesses are increasingly turning to alternative financing sources, such as credit cards, in lieu of bank financing.

To learn more about these challenges and about the initiatives that were identified at these meetings to address small credit issues, read the full story in Partners, now available online and in print.