The Broader Market

by Jordan Eizenga

Business Week published a decent article yesterday touching on the credit market conditions for small businesses (see here).  It notes that commercial and industrial lending experienced a decline of $900 million to $1.27 trillion during the week ending April 14, according to data from the Federal Reserve Bank. Clearly, the macroeconomic impact of high unemployment and decreasing home prices, coupled with contracting credit markets have contributed to the inability of borrowers, especially those that service or are low income borrowers, to meet their short term obligations with financial institutions.  Often these borrowers turn to non-traditional, community oriented financial institutions, such as Community Development Financial Institutions (CDFIs) for short term pre-development and bridge loans, while they attempt to obtain more permanent debt or equity financing.  However, the deterioration in the balance sheets of traditional lenders and the consolidation of commercial and retail banks has generally reduced the availability of permanent financing for these borrowers.  Alternative sources of equity capital from public agencies have also decreased as state and local budget issues mean decreased subsidies. 

The inability of borrowers to pay down CDFI originated debt has created a dilemma for some CDFIs: the CDFI can call a borrower in default and potentially bring to a close a project designed to assist those most in need; or, the CDFI can encounter significant illiquidity and restructure or extend the maturities of the loan such that the project can hopefully continue.  The latter option makes it difficult for CDFIs to not only continue lending, but to meet their own short term obligations. 

Until aggregate demand (the total demand for goods and services in the economy) picks up, borrowers will see decreased receivables and thus, decreased revenues from which they can service debt.  That being said, it is difficult to see an uptick in demand without employment growth, which will occur once businesses start hiring (and it is difficult to see them hiring without some form of financing to do so).  Fortunately, these socially minded creditors have proven somewhat resilient and have been able to simultaneously roll over their loans and keep themselves above water – a remarkable feat considering their circumstances.  After all, a rolling loan gathers no loss – at least, for now.

For an up to date look at the credit conditions across the United States, offered by the New York Fed, click here.