Why small businesses aren't borrowing

Nate Pollak opened two locations of his Great American Grilled Cheese Kitchen restaurants in San Francisco with "hard work and cash flow." So, he gave considerable thought to his decision to take on a loan to open a third location, which he expects to happen this fall.

"Small businesses live in many cases, just like our employees, paycheck-to paycheck," he told CBS MoneyWatch. "If there's a downturn in the economy, there's no giant pile of cash reserves or shareholders or big corporations that might be willing to bail us out. ... The federal government ain't bailing out small businesses, but they will gladly bail out large financial institutions. We saw that in 2008, didn't we?"

Pollack's unease about borrowing isn't unique, but actually taking out a new loan puts him in the minority among his peers. Data collected by the National Federation of Independent Businesses (NFIB) on small business sentiment found that many small-biz owners are skittish about borrowing money. Indeed, only 10 percent of those surveyed recently by the NFIB felt it was a good time to expand, "and 53 percent explicitly said they did not want a loan."

They have many reasons to be concerned. First, business owners want to avoid repeating the mistakes they made before the recession in taking on too much debt. They're also worried about unpredictable government policies on a variety of issues ranging from the minimum wage to health insurance. Plus, there's the looming approach of interest rate hikes from the Federal Reserve.

Regarding small-business borrowing, "We are nowhere near normal levels," Holly Wade, the NFIB's director of research and policy and analysis, told CBS MoneyWatch. "They are just unsure about how things are going to progress."

William Dunkleberg, the NFIB's chief economist, has seen this trend play out at Liberty Bell Bank, a community bank in Southern New Jersey near Philadelphia where he serves as chairman, and he finds it frustrating.

"We have money to lend," he told CBS MoneyWatch. "We just don't have enough good applicants. They are sitting on the sidelines."

Small-business loans are easier to get than they were five years ago, Ann Marie Melhum of the Small Business Administration (SBA) told CBS MoneyWatch. Even so, she noted that the economy is recovering slowly. "It's not booming, and (small-business owners) are being careful," she said.

The economic impact of small businesses is huge. According to the NFIB, these companies generated 60 percent to 80 percent of net new jobs annually over the past decade. They also contribute about half of nonfarm GDP.

Further complicating the borrowing picture for small businesses is the growing consolidation in banking that has occurred since the Great Recession. The bigger financial institutions get, the less profitable they find it to lend to independent businesses, even though they've gotten more creditworthy. That's because these companies generally are seeking loans of under $100,000, according to Karen Mills, a former head of the SBA who's now a senior fellow at Harvard Business School.

"The big banks and community banks have moved away from them because they are not economical," she said. "So, you will hear somebody say, 'Oh, you know there's no problem getting a million-dollar loan, a $500,000 loan, I've got banks chasing me. Everything is great.' ... Someody who's looking for a $30,000 loan, and the bank is not interested."

Banks are also eager not to repeat their mistakes of the past. According to Robert Ashbaugh, a senior risk management consultant at Sageworks, financial institutions are better at assessing creditworthiness than they were before the economic crisis.

The SBA, meantime, has seen a 20 percent increase in loans it underwrites since it reduced fees to zero for all loans under $150,000. And other types of lenders such as credit unions are ratcheting up their lending to small businesses. However, until the economy starts to show signs of more strength, small-business owners are gong to keep pinching pennies.