Board of Governors of the Federal Reserve System Report to the Congress on the Availability of Credit to Small Businesses

Section 2227 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires the Board of Governors of the Federal Reserve System to conduct a study and submit a report every five years to Congress detailing the extent of small business lending by all creditors. The act specifies that the study should identify factors that provide policymakers with insight into the small business credit market, including, among other items, the demand for credit by small businesses, the availability of credit, and risks of lending to small businesses. This is the first report submitted in accordance with that requirement. a The report relies on the 1993 National Survey of Small Business Finances, sponsored by the Board with support from the Small Business Administration, for details on the sources and types of credit used by small businesses. The survey also provides information on borrowing experiences of small businesses in 1993. More recent information on credit flows to small businesses are obtained from financial reports filed by lenders, Board surveys of commercial banks, and surveys of selected groups of businesses. This first report comes during a period of sustained economic growth, high levels of resource utilization, and low inflation. In this environment, conditions in credit markets have been quite favorable for business borrowers, large and small. Since the credit crunch and recession in the early part of this decade, business firms and financial institutions have made substantial strides in rebuilding balance sheets. Default rates on securities and delinquency rates on business loans are low, while earnings growth has been strong. Banks and other lenders thus are in good shape to meet prospective credit demands. Indeed, surveys of large banks indicate that they, on net, have continued to ease terms and standards for business loans over the last three years. Similarly, surveys of small businesses confirm that financing has not been a significant concern of most such firms during this period. Anecdotal reports suggest that banks and other lenders have aggressively pursued small business lending opportunities, in many cases to promote their institution's presence in community reinvestment programs. As discussed in the report, the types of financial arrangements and sources of credit used by small firms vary over time and with organizational form, industry, size, and other characteristics of the business. For example, according to the 1993 National Survey of Small Business Finances, most small businesses have used either personal or business credit …