Small Business Loans,

Thing Of The Past?

Small business owners are finding that banks, who have become extremely wary of risk, simply aren’t loaning to them. Despite the fact that small companies create more than half of America’s jobs, many owners are reporting that their home equity lines of credit have been cut, business credit lines withdrawn and credit card limits slashed. Still profitable firms even complain of a major pullback by banks, which many warn will halt a successful U.S. economic recovery Reuters reports.

Small business representatives like Todd McCracken, president of the National Small Business Association (NSBA), has warned that unless more credit becomes available, America’s entrepreneurs cannot expand, hire people and grow the economy.

According to U.S. Census Bureau data, in 2002 the U.S. had 112 million workers on payrolls. About 56.4 million of them, more than 50%, worked at small businesses. Such businesses vary in size, but usually have no more than 500 employees, if the company is a manufacturer. Retailers in this category usually have below $7 million in sales and construction firms below $31 million.

During the recent property boom, the same easy credit available to consumers to buy homes with no money down, became available to entrepreneurs to expand and hire people. But the home equity line of credit, a common source of loans for small businesses during the boom, has dried up. But two years into the recession, there have been only a few signs that bank credit may be loosening slightly.

In a quarterly U.S. Federal Reserve survey of bank loan officers in July, 3.7% of respondents said their lending standards had “eased somewhat” to firms with annual sales under $50 million, the first easing since July 2007. But 35.2% of respondents also said their lending standards had “tightened somewhat”, indicating there is still a long way to go.

In its half-year survey in July, 38% of respondents told the NSBA they had seen a decrease in credit lines or their credit-card limits in the past six months, up from 28% in December. Sixty-seven percent said they had been affected by the credit crunch, up from 55%. Even loans backed up to 100% by the U.S. Small Business Administration have dried up. So banks are balking at the risk even if the government covers losses.

The question remains, if banks aren’t going to loan to small businesses, what will happen to this important sector, or the U.S. economy for that matter?