The Cleveland Federal Reserve Bank recently posted an analysis of the reasons why small business lending has fallen off since the Great Recession, and cites four factors:
1. Banks have been shifting away from small business credit markets to more profitable sectors since the mid/late 1990s.
2. Small business demand for lending has eroded, as overall demand for their goods and services has eroded.
3. Credit has been harder to get, driven by reduced creditworthiness (as real estate values have fallen).
4. Banks have tightened lending standards, reducing the number of small companies able to qualify.
Policy corrections will need to address all these factors to be effective, but one solution that cities, counties and regions could explore is establishing/augmenting loan guarantee funds to help open the credit spigots again, and making sure that small businesses are fully tapping the SBA 7(a) programs (the major Federal loan guarantee program for small businesses).
See the report here: http://www.clevelandfed.org/research/commentary/2013/2013-10.cfm
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