Is Small Business Lending on the Mend?

A recent article on CNN’s website claims that the small business lending sector has begun to “heal itself.” Can this be true?

Lending to small businesses all but stopped last year in the wake of other financial turmoil on Wall Street. Few investors wanted to buy up small business loans on the secondary market, so few banks wanted to make the loans. The government made big plans this year to bail out the sector, promising up to $200 billion in funds for more loans.

What the CNN article says is that although very little of that money has been touched, the promise of more liquidity was enough to get investors interested in the secondary markets again.

“Back [in January] the market was pretty much considered nonexistent. Jump ahead to July … it looks to us that while the market isn’t 100% back, it’s in very good shape,” said Jim Hammersley, director of the SBA’s loan programs, earlier this month.

Here are the statistics: During the first three quarters of 2008, lenders resold on the secondary market a monthly average of $327.9 million in loans made through the Small Business Administration’s 7(a) loan program. After plunging to a low of only $85.9 million in January, things picked up again in May with $324.6 million in sold loans. The average has remained close to that number since then.

Yet strangely these figures do not translate into better conditions for actual small business borrowers. The FDIC reports that lending to small firms has shrunk by 1.9 percent over the last twelve months.

And the FierceFinance blog says that even though the top lenders in small business lending have been shuffled, there still isn’t much going on.

The new sheriff in town is Wells Fargo, which accounts for 7.7 percent of the [small business lending] market. Combined with Wachovia’s share, it accounts for nearly 10 percent. U.S. Bank comes in second with a 3.6 percent share. TD Banknorth came in third with 1.9 percent. The real story is that most big banks, Wells Fargo aside, have all but put the kibosh on small business loans. JPMorgan Chase’s volume fell more than 80 percent. Wells Fargo ended up on top by dint of the fact that it’s volume dropped less than others.

And even CNN, in a new article today, admits that despite the return of the secondary market, for small businesses “a long, protracted recovery may be the result.”