Small Firms Face ‘Substantial Constraints’ to Credit, Fed Officials Say

Small businesses are still facing “substantial constraints” in their access to credit and will  restrain from hiring as a result, Fed officials said.

In the minutes released today from the Fed’s Nov. 3-4 meeting of the Federal Open Market Committee,  officials expressed concern over the continuing tight credit market, particularly as lending  standards impact smaller firms that have, thus far, muddled through the credit crunch.

Regional and small banks are still vulnerable to the deteriorating performance of commercial loans and they continue to “tighten lending standards,” the Fed reported.

“Large firms with access to debt and equity markets for financing had relatively little difficulty in obtaining credit,” Fed officials said. “In contrast, smaller firms, which tend to be more dependent on commercial banks for financing, reportedly faced substantial constraints in their access to credit.”

The Fed added that limited credit availability “was viewed as likely to restrain hiring at small businesses, which are normally a source of employment growth in recoveries.”

“Bank loans continued to contract sharply in all categories,” the Fed concluded. “Participants noted that the dichotomy between significant easing of conditions in capital markets and continuing tight  conditions in the banking sector implied that financing conditions differed for large and small  firms.”

Bank credit remaining tight, the Fed noted, was a dark spot in an otherwise optimistic period for the financial markets overall.

“Financial market developments over recent months were generally regarded as supportive of continued economic recovery, with equity prices considerably higher, private credit spreads substantially lower, and financial markets generally performing significantly better than earlier in the year,” the  Fed noted.

Follow us on Facebook. http://facebook.com/ecreditdaily