Fed Member Offers Sober Note to Small Businesses

The U.S. economy depends upon the vitality of small businesses, but recent deteriorating financial market conditions and weakening real estate values could impact the sector, according to testimony Wednesday from a Federal Reserve member.

Frederic Mishkin told the House Small Business Committee that although market conditions have improved during the last several weeks from "rapid deterioration" in August, "problems could spill over to the market for small business loans."

While it's too early to reach definitive conclusions on the possible effects of recent turmoil on small entities' access to credit, Mishkin said, the Fed is "monitoring market conditions closely" to better understand the relationship between the "housing market slowdown and financial market stresses."

Although Fed data and its conversations with bankers show a healthy supply of credit to small businesses, "recent events have nonetheless almost surely had some negative effects on small business access to credit and we cannot rule out further effects," testified Mishkin. "For many borrowers, including some small businesses, these developments also mean that credit now is, and will probably continue to be, less available and more expensive that it was a few months ago."

He cited a Septemeber survey from Duke University and CFO Business Outlook that found about 25 percent of chief financial officers from small businesses said credit was more costly, or less available, following August's financial market turmoil.

Mishkin also identified one of the most important concerns about small business access to credit: Many small firms use real estate assets to secure their loans.

He said about 37 percent of small business loans in 2003 were collateralized by real estate assets and 15 percent was secured with personal real estate. "Looking forward, a reduction in the value of their real estate assets clearly has the potential to substantially affect the ability of those small businesses to borrow."

Small Business Committee Chairwoman Nydia Velazquez (D-N.Y.) noted in her opening remarks that small businesses continue to rely disproportionately upon more expensive alternatives to traditional credit than larger businesses, adding "our history has proven that as small businesses go, so goes the national economy."

By Sharon McLoone |  November 7, 2007; 12:35 PM ET Policymakers
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