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N.Y. Fed: Small businesses not borrowing

The Federal Reserve said on March 31, 2011,

The Federal Reserve said on March 31, 2011, it would release data on its emergency aid to banks after the Supreme Court rejected arguments to keep it secret. Photo Credit: Getty Images, 2009

A poll of businesses in the metropolitan area shows that many did not apply for credit during the first three months of 2011, and one-fourth of those were "discouraged borrowers" who expected to be turned down, the Fed says.

They didn't expect success because of low credit scores and a shortage of collateral, the Federal Reserve Bank of New York poll found.

In poll results released Thursday, the New York Fed said it had collected information from more than 850 small businesses in the metro region including the city, Long Island, northern New Jersey and Fairfield County, Conn.; the Virgin Islands and Puerto Rico.

"The poll takes a fresh look at borrower demand by asking firms not only about credit applications but also about reasons for not seeking credit," the Fed said. "The results provide insight into firms’ decisions about formulating credit demands."

Those polled typically had fewer than 10 employees and revenues of less than $5 million a year.

In the first three months of 2011, one-third of companies sought credit and, of those, two-thirds were approved for credit. Those approved had sizable revenues and appear  better able to provide collateral, the report said.

But many companies didn't even apply. Of those, 19 percent said they did not apply because they were paying debts, 21 percent said they didn't need more credit, and 27 percent believed they'd be turned down.

Many of the discouraged borrowers -- those who didn't apply because they expected failure -- said they held back due to low credit scores and a lack of adequate collateral; most of these firms also reported flat or declining sales in the first quarter.

Of those who were paying down debt, "nearly equal portions of this group reported sales increases and sales declines," the report said. The report concluded that some had to pay down their debt due to weaker sales, and some were choosing to do so because they had enough money due to increasing sales.

The poll showed that many companies rely on earnings and personal or family money for financing. More-successful businesses relied on lines of credit, while less-successful companies used credit cards.

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