While most of the nation’s attention is focused on saving behemoth financial firms, small businesses are struggling to ride out a perfect storm of tougher credit conditions in a badly hobbled economy. Many small business advocates are saying the result is that the finance sector’s woes are expanding, rather than relieving, economic weakness. Even government programs designed to help small business are falling down on their mandate just when they are needed most. Many factors are coming together to make this a perfect storm for small businesses.

Until recently, most small business owners could go to their local banks and get an unsecured loan of $100,000 or more - but those days are long gone. In the past, owners could put up buildings or equipment for loans needing collateral; similarly service companies could post solid track records of positive cash flow. But under sharply tightened lending standards, these are no longer any guarantees to get needed funding. Besides, with so much manufacturing having migrated offshore, there is less equipment to use as collateral, and property values have plummeted around the country. As a consequence, small businesses using bank loans - far preferable than relying on credit cards - is at a 15-year low.

Sixty percent of domestic banks reported having tightened standards on commercial and industrial (C&I) loans to medium and large firms. Some 32 percent of small businesses surveyed by the National Small Business Administration (NSBA) said they were experiencing worsening bank terms, forcing many to use credit cards more. It’s a tighter market, which means it takes a little longer and there is more scrutiny.

One of those new tighter hoops is tighter scrutiny of credit scores. But that particularly complicates small businesses because many owners’ personal and business credit histories are co-mingled, with the debt businesses normally have to carry pulling down overall scores. Because of a general credit tightening, everyone wants to get paid back sooner, much faster than the customary 45-60 day payback period, even while banks are taking longer to process loans. This in turn reduces the ability to grow and cuts into profitability.

WHAT NEEDS TO BE DONE

The NSBA can issue loan guarantees to banks to help them feel more comfortable making loans, but NSBA Chairperson Marilyn Landis said this critical agency has been “badly undermined by some of the most severe budget cuts suffered by any government.”

In a statement made last April, Landis called for much-needed reform of the credit card industry. She asked for improved disclosure and industry-wide standards for defining timely payment. Landis also cited the need to eliminate universal defaults, double-cycle billing, retroactive interest rate hikes, interest charges on transaction fees, and extra interest charges on debt that is already paid in full. “Credit cards have become the most highly-used source of financing for small-business owners,” she said. “Forty-four percent of respondents to the 2008 NSBA survey cited credit cards as source of financing - the only source of financing that did not decrease between 2007 and 2008. If we continue to rely on small business to bring our country out of this economic downturn - as we’ve done in the past - we absolutely must provide them with the tools to grow.”

Publication date: 11/24/2008