Commercial lending is closing in on its previous high after sinking during the recession, but loans to small firms keep falling as economic and policy uncertainty chill demand.
Small businesses are especially dependent on banks as sources of capital. Large corporations can issue debt or shares to raise funds.
Outstanding small business loans in Q3 totaled $584.1 billion, down 18% from its 2008 peak of $711.5 billion and comparable to what was seen in 2004. Overall commercial lending of $2.51 trillion is the highest it's been since early 2009.
Small Firms Not Demanding The population of small firms has dropped since the recession, contributing to the fall-off in borrowing. But the number of mid-size and large firms has declined too.
"The bottom line really is lack of demand," said Raymond Keating, chief economist for the Small Business and Entrepreneurship Council.
Surveys of bank loan officers conducted by the Federal Reserve show standards for small firms are easing, but demand isn't there. Meantime, demand from bigger companies is growing.
While the election has lifted some political uncertainty, business owners may still face additional costs related to ObamaCare and higher tax rates. "They know the answers aren't going to particularly favorable, whatever the outcome is," he said.
Weakness in the small-business environment weighs on job growth. Firms with less than 100 employees account for more than a third of private-sector employment, and those with less than 500 account for nearly half.
Uncertainty over business conditions is at a record high among small firms, keeping loan demand down, said William Dunkelberg, chief economist at the National Federation of Independent Business.
Willingness among small firms to expand or make capital expenditures has improved little since the recession ended, according to NFIB surveys.
Small businesses "don't know what to do with the money," Dunkelberg said.
Larger firms are more likely to borrow to take advantage of opportunities in other parts of the world, like China and Brazil, he added.
"Their view of the economy is the world," he said. "They have a lot of places to make money.
Changes in the banking sector since the financial crisis could be shutting out some small firms from the credit they want.
A study from the Small Business Administration earlier this year noted banks have become more risk-averse, and that bank consolidation hits small firms harder, especially for those trying to borrow less than $100,000.
No Need To Expand Michael Fredrich, president and owner of MCM Composites, has a good relationship with his small community bank, which has provided loans for equipment upgrades and even lowered interest rates for him.
But his Manitowoc, Wis., composite parts manufacturing business, which serves aerospace, defense, electronics and consumer product markets, is only running at about 50% capacity, meaning he won't need to expand if more orders start coming in.
He's trying to stay flexible and is ready to downsize in the event taxes go up. But he also doesn't want debt-service costs to eat up available cash and has been trimming debt since he bought the company 11 years ago. Even if business picks up, he still plans to cut debt down to zero.
"Debt can kill you," he said. "The more debt you have, the less flexibility you have."