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Small Business Credit Is Tightening

Written by CMG News Contributor, Doug Carleton

I was writing a blog in 2010 after the 2007 to 2009 recession was beginning to wind down and the economy was beginning to recover. Banks were suffering, especially because of all the bad real estate loans in their portfolios. The FDIC keeps a list (unofficial) of problem banks. In January 2010, the number was 570. By September, it was 702. That was just banks that made the FDIC’s problem list. Many other banks were suffering losses because of the loans that had gone bad not only on real estate but as a result of business failures – many of them small businesses. As a result of those problems and crackdowns by banking regulators, small business lending dropped dramatically and did not reach pre-recession levels for several years.

While there is no banking crisis today, new caution is beginning to appear in their small business lending because of business conditions caused by the pandemic. Another negative factor for small businesses unrelated to the health of the economy is that there has been a significant decline in the number of community banks across the country, and community banks have historically been major small business lenders. Between the end of 2007 and September 2020, the number of FDIC-insured banks has declined nearly 47%, many of them community banks. Small business owners may have managed brilliantly through the crisis so far, but because of factors totally out of their control, their revenues and profits have decreased, some substantially. Even though the stimulus bill was finally signed and the economy is just beginning to show signs of life, sales and profits have declined in many cases. Because many businesses may be facing a substantially changed consumer, making projections for your bank could be much more difficult. All of these factors make banks more hesitant to lend, plus they anticipate many more defaults in the next several months. So all of these factors are helping to create a tightening credit environment.

This should stand as an alert to any small business owners who may be anticipating growth and will need financing to do it. Find out what your banker is going to be most concerned about. Cash flow? Balance sheet? Customer or industry concentration? Are you in an industry that is not performing well overall, even though you may be doing well? You want your banker to know as much as possible about the industry you are operating in and to show that you can generate profits and cash flow and will be able to pay back their loan. For example, suppose you expect to need a working capital loan of X dollars. Ask your banker approximately what the monthly payments might be so you can look at your cash flow to see if you can cover the loan payments. This could communicate to the banker that you understand the most critical elements of your business and where your banker is coming from. In a stringent lending environment, communication with your banker is crucial. But also, know what other options might be available to you, such as online lenders. Plan ahead.

Communication and knowledge. Two tools to help you navigate a tight lending environment.


This blog entry is a slightly edited excerpt from Doug Carleton's 'The Daily Life Of A Small Business Owner' series. Doug has been a mentor with SCORE, Startup Virginia, and Lighthouse Labs, and has 25+ years of experience in small business finance including 12 years in SBA lending. To contact Doug directly, please email him at


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