Small-Business Owners Project Less Need for Credit: Wells Fargo

Small-business owners' optimism about the economy is dwindling, which casts a dark cloud over banks' lending efforts, according to a new survey conducted by Wells Fargo and Gallup.

More business owners are pessimistic about their financial situation and they expect to spend less on capital projects and hiring in coming quarters, according to the survey. The Wells Fargo/Gallup Small Business Index, which is based on the survey's results, declined for the third straight quarter.

"Business owners are not demonstrating an interest in investing in a major way in their business, so credit is not a major issue," Doug Case, small-business segment manager at Wells Fargo, said in an interview.

Debt levels appear to be falling, as 38% of those surveyed said they have less business debt now than a year ago. That's a larger percentage than the 26% who said they had less debt, the last time that question was included in the survey, in April 2013.

The reluctance to spend is a symptom of a weak economic recovery, Karen Mills, former head of the U.S. Small Business Administration, said in an interview.

"There's wariness among small-business owners to expand when they're not seeing robust demand for their products and services," said Mills, now president of the investment firm MMP Group.

"Not seeing small-business owners borrow to try and grow an enterprise could make the credit demand not as robust," she said. "These are worrisome trends."

An additional finding from the survey was that fewer business owners reported an increase in company revenue during the third quarter.

"With the economy growing as slowly as it has been, it's been difficult for many business owners to increase their sales," Mark Vitner, Wells Fargo Securities' chief economist, said in a Monday news release.

Rather than make new capital investments, such as buying new computers or machinery, small-business owners are "extending the life of the assets they have," Case said.

"Things are so weak that small businesses are not interested in buying anything new," said Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University's Weatherhead School of Management.

"That's a canary in a coal mine that tells us there won't be much small-business activity in the future," Shane said.

A potential rise in interest rates does not seem to cause widespread concern. About 39% of survey respondents said a rate increase would have a negative effect on their business. That's partly a reflection of the high rates they already pay, particularly to alternative lenders, Shane said.

"Because small businesses are borrowing at a much higher interest rate, the interest rate they pay may not be very directly related to the Fed rate, or there may be a lag or so much of a cushion that it doesn't matter," Shane said.

Even so, some small-business owners fear that a rate increase will hamper their own recovery, Mills said.

"The hope is the effect" of a rate increase "will be marginal and not dampening, but if the economy is dampened a bit the consumer is not going to be spending as much," she said. "Small businesses are concerned that whatever progress they've been making may flatten out."

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