Recent surveys suggest that hiring by small businesses is finally starting to gain momentum. That’s good news, because until now it has been a missing ingredient in the economic recovery.
Through 2009 and much of last year, small firms continued to lay off more employees than they hired. Indeed, businesses with fewer than 50 employees-which employ nearly one-third of private-sector workers nationwide-accounted for roughly two-thirds of all jobs cuts.
Economists say one likely cause of weak small-business hiring is a credit crunch resulting from the financial crisis that triggered the recession. A new report from the Small Business Administration supports that view.
The SBA report shows that the total value of outstanding loans to small companies fell by $59 billion, or 8.3 percent, in the two years ended June 2010. Much of that drop-$43 billion-occurred after June 2009.
Outstanding bank loans to large companies also fell over the two-year period. But as the SBA noted, those businesses can obtain credit from other sources. For a small firm, a bank loan often is the only option.
SBA-backed lending-nationally and in the Rochester market-rose in the fiscal year ended Sept. 30. But stimulus-funded incentives played a big role in that increase, and most of those ended on Dec. 31.
Going forward, the new $30 billion Small Business Lending Fund for banks with less than $10 billion in assets should help direct more funds to small-business borrowers. But the SBA cautions that these banks do not account for most lending to small companies.
Bigger banks have the largest share of small-business lending. And they accounted for much of the decline in outstanding loans, the SBA says.
What’s to be done? As a recent Federal Reserve report concluded, the problem is "complex and multifaceted." Conservative lending policies have been matched by weak demand from small firms uncertain about the recovery’s strength and longevity.
With growing evidence that the expansion is strengthening, however, banks of all sizes should take a leading role in boosting credit activity in the small-business sector. Without the hiring that access to capital allows, reducing unemployment and sustaining the recovery will continue to be a long, uphill trek.
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