Author: Joan Weber

The share of small businesses and mid-sized companies that report borrowing from banks has declined from recent highs reached last summer — despite the fact that these firms say improving credit conditions are actually making it easier to obtain loans.

According to the results of a May Greenwich Market Pulse, the percent of small businesses that said they had nego­tiated a new bank loan or refinanced in the prior three months declined only slightly to 32% in May 2012 from 34% in July 2011. However, the drop among mid-sized companies was more pronounced: 30% of mid-sized com­panies participating in the Greenwich Market Pulse said they had taken out a new loan or refinanced an existing loan in the prior three months — down from the 43% of these companies that had reported loan activity in July 2011.

What makes these findings particularly striking is the fact that both small and mid-sized companies report improvements in credit conditions that make it easier for firms to secure bank credit, albeit with a more robust shift among mid-sized companies. The accompa­nying charts show movements in the Greenwich Credit Availability Index. For small businesses, the Credit Availability Index was mired in negative territory from Q3 2007 through early 2012 which meant that small businesses thought credit conditions — or their own ability to obtain credit — were deteriorating. Although a significant number of small businesses remain con­cerned about their ability to secure necessary bank cred­it, the overall index finally moved into the positive range in May 2012, meaning that companies on net think con­ditions are improving.

For mid-sized companies, credit conditions improved much faster in the wake of the economic crisis and the Credit Availability Index for these companies climbed into positive territory in July 2011. After a subsequent quick dip, the Index continued to climb and now stands at its highest point since September 2005.

“These findings strongly suggest that, among mid-sized companies and the very top-end of the small business segment, credit shortages that in recent years have con­strained firms from any thoughts of expansion are less of a concern,” says Greenwich Associates consultant Duncan Banfield. “For companies with healthy credit ratings, loans are readily available at favorable rates and often extremely favorable terms. But fewer companies are tak­ing advantage of this opportunity — apparently due to serious concerns about the state of the business environ­ment and the direction of the economy.”

Downturn in Sentiment

The results of the new Greenwich Market Pulse reveal a sharp decline in confidence about the economy among small businesses and mid-sized companies. The Greenwich Optimism Index among companies in both groups remains in positive territory, meaning that the number of companies expecting economic improve­ment is larger than the number expecting economic deterioration. However, both Index scores nosedived in the first half of 2012 as the European sovereign debt crisis and a series of disappointing economic data releases in the United States roiled markets and renewed recessionary fears.

“At the end of Q1 and the start of Q2 the negative news just reached a saturation point, with the Greek crisis, persistent unemployment and a general softening of the economy,” says Greenwich Associates consultant Don Raftery. “In this kind of environment, it’s hard to be opti­mistic about growth potential.”