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Small Business Lending

FDIC Forum Seeks Solutions to Small Business Lending Obstacles

Small businesses are critical to fueling the nation’s economic growth. They employ roughly half of all Americans and account for more than 60 percent of net new jobs.1 Their ability to generate new jobs depends in large part on access to credit. In the wake of the recent recession, small businesses’ demand for credit waned as they faced the more immediate challenges of weak sales and heightened business uncertainty. Now, as the business outlook improves, credit demand from small businesses is beginning to strengthen. However, access to credit remains a challenge for some. Lower real estate values and the cumulative effects of lower revenues have damaged small businesses’ credit capacity, and banks’ lending standards—although no longer tightening—loosened only marginally in 2010. In addition, as evidenced by high levels of problem banks, the recession has affected the ability of some banks to lend as they focus on correcting existing problems. In response to these issues, policymakers and regulators continue to actively seek ways to facilitate the flow of credit to small businesses.

On January 13, 2011, the FDIC hosted a forum, “Overcoming Obstacles to Small Business Lending,” to identify credit-related issues facing small businesses and potential solutions.2 The forum fostered communication among policymakers, regulators, small business owners, lenders, and other stakeholders. The forum featured leaders in the government and private sector, including Spencer Bachus, Chairman, House Financial Services Committee; FDIC Chairman Sheila C. Bair; Federal Reserve Chairman Ben S. Bernanke; Mark R. Warner, U.S. Senator, Commonwealth of Virginia; Thomas D. Bell, Jr., Chairman of the U.S. Chamber of Commerce; Jorge C. Corralejo, Chairman of the Latino Business Chamber of Greater Los Angeles; John D. Harrison, Superintendent, Alabama State Banking Department; Kathleen P. Sowa, National Business Credit Executive, Bank of America; Karen Mills, Administrator of the Small Business Administration (SBA), and other experts, regulators, and industry participants.

Highlighted below are some of the key issues raised at the forum, including the sales environment and small businesses’ demand for credit, banks’ supply of credit, and bank regulators’ approaches to evaluating small business loans. In addition to identifying common obstacles currently faced by small businesses, forum participants also assessed existing efforts and suggested additional policies to ensure that creditworthy small businesses have access to the credit they need in order to grow, create jobs, and help fuel the economic recovery.

Small Business Sales and Loan Demand Depend on a Recovering Economy
The overall economic recovery is critical to small businesses’ sales outlook and their demand for credit. Small businesses continue to identify poor sales as their single most important problem, a situation unchanged since late 2008, according to surveys by the National Federation of Independent Business (NFIB). While weak sales have dampened small business loan demand, Federal Reserve Chairman Bernanke explained that a strengthening economy will fuel a circle of recovery: “We see the economy strengthening,” Bernanke said. “And that means more sales…that will make these businesses stronger, make them more creditworthy and it will be a virtuous circle…More cash flow and also higher collateral values makes businesses more creditworthy, gives them more credit demand, allows them to expand, allows them to hire.”

Panelists acknowledged several existing initiatives that support small businesses. For example, recent legislation increased the lending capacity of SBA programs and created tax incentives for business investment.3 With regard to the business environment, the level of legislative and regulatory uncertainty—frequently cited as an obstacle by small businesses—has been easing. For example, Mr. Bell of the U.S. Chamber of Commerce acknowledged the temporary extension of tax relief passed in December: “The activities of December will have a very, very positive effect I think on the overall economic environment, but particularly with regard to small business of confirming the tax rates, even though it’s only two years.”4

Panelists offered additional policy recommendations to support the operating environment for small businesses. For example, Senator Warner emphasized the need to expand the nation’s export capabilities. Mr. Bell echoed those views, calling exports the “number one market expansion opportunity for small business and frankly for all business.” Bell also called for the government to finalize three pending trade agreements coming before the Congress. In addition, panelists discussed small businesses’ access to government contracts. Jorge Corralejo, Chairman of the Latino Business Chamber of Greater Los Angeles, addressed the need for more public data on the share of government contracts awarded to small businesses: “[Y]ou cannot analyze what you’re doing with the small business sector if you don’t know what’s going on…that kind of analysis is really critical to dealing with unemployment, dealing with contracting, dealing with lending.”

The Weak Real Estate Market Weighs Heavily on Small Businesses
Forum participants cited the weak real estate market as a significant obstacle to small businesses’ access to credit. Small business owners are heavily invested in both residential and commercial real estate, which they often use as collateral for their business loans. These borrowers are strained when banks require additional collateral due to declining real estate values.

A wide range of policies has been established to help restore the real estate sector and address its impact on small business credit. For example, FDIC Chairman Bair highlighted federal regulators’ recent policy statement on commercial real estate loans: “[W]e do not want our examiners criticizing an otherwise creditworthy loan just because the collateral has declined…a supervisory policy that requires criticism that additional capital be held against the loan just [because] the collateral has fallen is highly pro-cyclical, and we wanted to avoid that.”

In addition, Federal Reserve Chairman Bernanke pointed to several actions taken by the Federal Reserve: “[W]e’re working hard on lots of different fronts…[W]e bought a few mortgages, for example. We’re trying to get the economy going…[And the Term Asset-Backed Securities Loan Facility was an attempt to] get the secondary market going again for commercial real estate, commercial mortgage-backed securities, as well as other kinds of loans, including small business loans.”

However, forum participants stressed the need for additional action on several fronts. In the near term, foreclosures remain a pressing concern. As Kathleen Sowa, National Business Credit Executive at Bank of America, put it, “I think we need to get the foreclosures behind us…[W]e still have a lot of people…that can’t… afford to be in their homes…[G]etting that problem behind us is very important for small business to move forward.” Mr. Bell agreed and called for a mechanism to clear distressed real estate: “There is a huge unrealized and unaddressed loan loss imbedded in the banking community from real estate…If we want to get the stuff out of the system…you’ve got to create [a Resolution Trust Corporation]-type structure.”

In addition, FDIC Chairman Bair acknowledged ongoing efforts to restore the securitization market, which will take some time to heal: “[We are] trying to come up with better standards to bring the securitization market back in a way that will appropriately align economic incentives and ensure high quality and transparency for investors buying those securities. But I think that’s going to take a while to do.” For the longer term, Federal Reserve Chairman Bernanke identified the need to reform the government role in housing finance: “Obviously, the biggest problem…will be the Fannie [Mae] and Freddie [Mac] reforms which…will be critical to reestablishing the soundness of the residential mortgage market.”

Ensuring Credit is Available to Creditworthy Borrowers
Lenders’ willingness to supply credit to small businesses was another key topic. Federal Reserve Chairman Bernanke noted early signs of improving sentiment among small business lenders: “[I]t’s certainly still a very tight situation. But I think things have stopped getting worse and are looking a little better.” Banks naturally tightened their lending standards as a result of the recession. As Mr. Bell explained, “[I]f you’re a bank, you almost lost your franchise…[and if] you’re a borrower and you almost lost your business…human nature is…to be a more careful lender and…a more careful borrower.” 

Regulators are working to ensure that lenders do not overreact and limit credit access to creditworthy borrowers. According to FDIC Chairman Bair, “I think maybe some banks also became a little more risk averse perhaps than they should have been.” She added, “We’re encouraging banks. We want them to…make safe and sound loans.” Regulators are emphasizing a back to basics approach to underwriting. As Federal Reserve Chairman Bernanke explained, “Our guidance is very clear. You shouldn’t be rejecting loans because of the industry or because of the geography, or some category. You need to look at each individual business…the only way to make loans is going to be by doing the work.” 

Some forum participants also highlighted the availability of alternative sources of credit. For example, SBA Administrator Karen Mills noted that SBA lending programs reached record volumes. “[T]he SBA in the last quarter had its strongest quarter ever in the history of the SBA. We put out $10 billion in this last quarter into the hands of small businesses.” Mr. Corralejo called for more funding for SBA and other alternative credit programs: “The biggest problem is that it’s a digit too the lending to CDFIs [Community Development Financial Institutions]…alternative means of providing credit…you’re looking at some extraordinary measures that could serve some good. The problem is there’s not enough funding.”

Regulators Are Working to Communicate a Consistent Message
An early and recurring theme at the forum related to perceptions of a disconnect between regulatory and supervisory policies developed in Washington, DC and the way field examiners apply these policies. More specifically, although the regulatory agencies have issued guidance to ensure examiners are flexible and balanced when banks assist existing small business borrowers who are having problems, bankers and others asserted that this message is not being properly communicated to examiners.5 

For example, after acknowledging the joint examination guidance that indicates prudent small business lending will not be criticized, Congressman Bachus stated, “Sadly that guidance is not always filtering back to the operational level, as indicated by the constant stream of comments I and my colleagues…receive from community banks and their small business customers…This has become so commonplace that it has become known as the mixed messages problem.” At the same time, John D. Harrison, Superintendent, Alabama State Banking Department, emphasized the value of local expertise at the field level. “[I]t looks like we’re all coming down from Washington,” he said. “We need to be sending that authority and that responsibility down to that region and that field level person that should be able to work with that institution, know that market, know the economic conditions and come up with a sound judgment.”

In addition to communications issues, some participants suggested that some examiners and bankers are adopting an overly conservative approach to small business loans.  For example, Senator Warner pointed out, “[W]hether you are a lending officer or…a bank examiner,…human nature…pushes you to more conservatism.”  Similarly, some bankers, feeling pressure to improve their balance sheets, may be more restrictive when granting credit and partly attribute their reluctance to supervisory policies and examiners. As FDIC Chairman Bair noted, “[S]ometimes our examiners are used as an excuse. [Bankers] may not really want to make the loan, and [they say,] ‘Oh, our regulator won’t let me do that.’ So some of that happens.”

Regulators at the forum emphasized the need to balance the regulatory process to ensure that prudent loans are made, while minimizing the potential for examiner or banker overreaction.  They acknowledged that instances of conflicting messages should be minimized and discussed the process for consistently communicating policies from Washington, DC, to field examiners.  They also indicated that feedback mechanisms are available for bankers to voice concerns about examiner application of policies through agency management chains and ombudsmen. For example, Federal Reserve Chairman Bernanke noted, “[T]he Federal Reserve’s had an ombudsman since 1995…[I]f you’re a bank and you think you’re not getting fair treatment and you’re worried for some reason about complaining to your examiner, then call Washington and we’ll respond to that.” Similarly, FDIC Chairman Bair stated, “[I]f you have a situation where you don’t think that policy has been applied, I want to know about it, because we’re really trying very hard not just to articulate these policies in Washington, to make sure they are followed in the field.”

Forum participants also called attention to the FDIC Small Business Hotline, a new tool that allows borrowers with an inquiry or comment about small business lending to contact the FDIC directly.6 FDIC Chairman Bair said the hotline will help regulators assist small business borrowers and learn more about banks’ lending practices: “Not only do we want to help these borrowers, but also we can track this information the way [we] track consumer inquiries. And if the particular banks [have] areas where we’re seeing…a greater frequency of problems, we can look at that more deeply.  So I think it will be very helpful to us as a supervisory tool as well.”

There are no easy solutions to the obstacles facing today’s small businesses. Poor sales have weakened many businesses’ demand for credit. Those who do need credit are strained by lower real estate values and still tight lending standards. And regulators must communicate a consistent message that encourages a safe and sound approach to lending. Participants at FDIC’s forum—policymakers, regulators, small business owners, lenders, and other stakeholders alike— acknowledged these challenges and offered constructive ideas for addressing them. Recommended strategies spanned a broad range, from policies to improve the overall economy and real estate markets to consistent implementation of regulatory guidance and a hotline to obtain direct feedback from borrowers and lenders. Perhaps the greatest lesson learned from the forum was that continued communication and cooperation among all concerned parties will be the best way to promote a lasting recovery for small businesses.

1 The Small Business Administration (SBA) defines small businesses as firms with fewer than 500 employees. See SBA Office of Advocacy .

2 The forum agenda, transcript is available at

3 Small Business Jobs Act of 2010, PL 111-240, September 27, 2010.

4 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, PL 111-312, December 17, 2010.

5 See FDIC, Federal Reserve Board, Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), National Credit Union Administration (NCUA), and Conference of State Bank Supervisors, “Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers,” February 5, 2010,; FDIC, Federal Reserve Board, OCC, OTS, NCUA, and FFIEC State Liaison Committee, “Policy Statement on Prudent Commercial Real Estate Loan Workouts,” October 30, 2009,; and FDIC, Federal Reserve Board, OCC, and OTS, “Interagency Statement on Meeting the Needs of Creditworthy Borrowers,” November 12, 2008,

6 The FDIC Small Business Hotline is 1-855-FDIC-BIZ (1-855-334-2249). The FDIC will respond to inquiries and comments made about issues and institutions under FDIC jurisdiction and will make referrals to other agencies and information sources as appropriate. For more information, see