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Latest Data on Small Business Credit

posted by Bob Lawless

Yesterday, news stories appeared in a number of places about a new report from the Small Business Administration (SBA). This headline from the Miami Herald nicely summarizes it: "Credit Cards Drive Up Small Business Debts." If you look at the bankruptcy schedules of the self-employed, there is no question that credit card borrowing plays a major role in financing small business. With the high interest rates that credit card debt carries, it may be a dubious mechanism to gain small-business financing. For small business owners, the advice given in the Miami Herald article by Michael Bush, president of SCORE (a small-business counseling group), is sound: "The only case where credit card debt might make sense . . . is to cover short-term cash flow problems, but only after draining bank accounts and borrowing money from family and friends."

The Miami Herald states, "From June 2004 to June 2005, the number of businesses with outstanding loans under $100,000 jumped from 15.2 million to 19 million. A full 70 percent of that figure was due to credit card debt, the study found." That appears to be a misreading of the underlying report, which is quite understandable given the report's confusing presentation and incomplete explanation of how the numbers were calculated. The 70 percent figure appears to be the percentage of loans under $100,000 that were done by the largest banks. Exactly what else does the SBA report say? With a stack of bluebooks that needed graded staring at me, I did the only sensible thing and found something else to do. Hence, I spent part of my morning trying to decipher the SBA report. Here is what I took away from it.

First, it is important to note the report's date. It reports data from June 2004 to June 2005, meaning its data are eighteen months old and are all before the effective date of the 2005 bankruptcy law. The report is part of an annual series from the SBA on small business lending in the U.S., with reports from 1994 onward available online. The reports are compiled and released approximately 18 months after the ending date of the data cycle.

The SBA report does not appear to have solid data on business credit card borrowing. To the best of my knowledge, there are data available on credit card lending and on business lending, but I am not aware of data that reports business credit card lending as a separate category, although I would be happy if blog readers could explain to me where I can find such data. The SBA compiles its statistics from "call reports" that banks file with the FDIC. The call reports do not require the banks to report small-business lending separately. Hence, the SBA considers all business loans under $1 million to be "small business loans" and all business loans under $100,000 to be "micro business loans." In turn, the SBA appears to use "micro business loans" as a proxy for business credit card borrowing. Those are reasonable proxies for data that are otherwise unavailable on small business lending, but it is also important to keep in mind that the SBA data are proxies.

Gathering the micro business loan data for previous years from older reports and then using the Consumer Price Index for All Urban Consumers (CPI-U) to restate the data into 2005 dollars, we get these statistics:

YearAmount Outstanding
in Nominal Dollars (billions)
Amount Outstanding
in 2005 Dollars (billions)
Number Outstanding
(in millions)

As usual, a more detailed examination of the data deflates the certainty of some of the findings. Even if the micro business loan data are an indicator of business credit card borrowing, some of the data seem to fluctuate wildly from year to year. For example, the number of micro business loans outstanding jumped from 2001-2002 by 45.4%, declined from 2003-2004 by 11.1%, and then jumped back up by 25.0% from 2004-2005. The SBA report itself notes, "Changes in the value and number of the micro business loans (under $100,000) remain difficult to interpret, for various reasons." The report then footnotes several reporting issues that could cause the data to change dramatically from year to year. A change in the reporting practice of even one major small-business lender could have a dramatic effect on the statistics.

Although the data are problematic on a year-to-year basis, the annual fluctuations should wash out over the long term. Looking at the long term, the dollar amount of micro business loans outstanding has barely climbed since 1994, once one adjusts for inflation. The number of micro business loans has clearly increased dramatically. That suggests the average amount outstanding on any one loan has decreased, which in turn is suggestive of increasing reliance by small businesses on business credit cards. These numbers do not take into account, as the SBA notes, the use of personal credit cards to finance small business expenses. It is doubtful that the number of business credit cards swings as wildly from year to year as these numbers would indicate, but the increasing reliance on high-cost small business debt in the form of credit cards is something that deserves serious study.


thanks for the great information.:)

thanks for the great information.

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