Further evidence that businesses are still facing tough credit conditions

Toby Madden | Regional Economist

Published January 1, 2010  | January 2010 issue

It’s widely believed that businesses are having a hard time accessing bank credit. For example, respondents to the Minneapolis Fed’s manufacturing survey and business outlook poll both said that their company’s access to bank credit had deteriorated over the previous three months.

Another (less scientific) poll adds further evidence, but may overstate credit problems. Nearly 43 percent of over 500 respondents indicated that their company’s access to bank credit had deteriorated over the previous three months.  This November 2009 online credit conditions poll of district businesses, conducted with the help of state chamber of commerce organizations in the district, was distributed via e-mail, and access to fill out the poll online was not controlled.

“Banks are being very careful, but seem to be OK with clients that are solid. But [banks are] a long way from ‘pushing money’ at us,” said a large manufacturer in the online poll. This response was fairly representative of overall results, and respondents to the online poll reported more credit difficulty than those to either the manufacturing survey or the business outlook poll conducted by the Federal Reserve Bank of Minneapolis.

Notably, only 4 percent of respondents to the chambers of commerce poll indicated that credit conditions have improved. Many companies that had a tough time accessing bank financing blame overall credit market conditions (43 percent). “We were told that the bank didn’t want to take on any more liability and that they were being reined in by … examiners,” a small Montana real estate company said. The other culprits were pretty evenly split among the bank’s financial health (19 percent), the condition of the respondent’s industry (22 percent) and how the respondent’s own business was faring (21 percent).

Respondents also reported that the lack of access to credit was negatively affecting their company’s capital expenditure plans (65 percent), expansion plans (51 percent), hiring (45 percent) and the ability to carry inventory (33 percent). Tighter credit conditions have been revealed through more loan documentation or covenants (94 percent), higher cost of credit (88 percent) and lower debt limits (65 percent).

Many companies have in turn tightened their credit standards to their customers (42 percent). “Everyone wants to keep their money longer,” said a small Minnesota manufacturer. Companies are also facing tighter credit access from their suppliers (46 percent) in the form of higher interest rates on outstanding debt (90 percent), lower credit limits (79 percent) and shorter repayment periods (68 percent). 

Credit Conditions Survey [.xls]