Small Businesses Struggling To Get Loans: Federal Reserve Study

Allison O'Neill founded Bundle, an infant and toddler clothing store in New York City, in 2008. She is one of many entrepreneurs who have faced challenges securing small business loans in recent years.

"I had great credit," O'Neill told the Federal Reserve Bank of New York, as part of a survey of small business borrowers. "I had basically four times the amount of a loan I was looking for, in my brokerage account, and they didn't care. They were just like, we're not taking any risks on startups."

In this so-called economic recovery, it has gotten harder for small businesses like O'Neill's to get loans. The number of U.S. small business loans, defined as $1 million or less, declined 5 percent last year, according to a study by the Small Business Administration released in July. The dollar amount of small business loans declined 7 percent.

Moreover, the economic downturn has crushed the dreams of many entrepreneurs. More than 170,000 small businesses in the U.S. shut down between 2008 and 2010, according to a recent analysis of U.S. Census Bureau data. Many others simply couldn't get the financing to start up in the first place.

The New York Fed's newly released Small Business Borrowers Poll sheds more light on the financing challenges that small businesses face. The central bank, which polled 544 small businesses in New York, New Jersey and Connecticut in April and May, found that only 13 percent of small business loan applicants received the full amount of credit they had sought over the previous year. For another 36 percent, only a partial amount of credit was approved.

Most small business loan applicants did not ask for much. More than half sought a microloan -- $100,000 or less, typically for short-term working capital. But lenders were more likely to turn down microloan applications than larger loan applications, likely because they were skittish about lending to newer firms and more likely to turn down startups.

Firms in the New York area that successfully secured a small business loan were 21 percent older and had 233 percent more employees than firms that could not secure a small business loan, according to the poll. Lenders also were less likely to lend to small businesses that could not show constant or rising sales or existing bank relationships.

Many small business owners are giving up on applying for loans at all: Between May 2011 and May 2012, 59 percent of small businesses in the New York area did not apply for a loan, according to the poll. Half of those non-applicants said they did not apply because they did not think they would be approved.