Tight credit becomes problem for small-business owners
— -- As lawmakers debate the proposed financial bailout bill, small-business owners — who are especially vulnerable to financial meltdowns — face even tighter credit than usual.
They're tapping credit cards and personal savings as it gets harder to land bank financing. They appear to be hoarding their cash, anticipating worse economic times. And unless the rescue bill frees up credit, they'll likely find it harder to get federally guaranteed loans.
Small businesses employ 116 million workers and crank out half of the U.S. gross domestic product, says the Commerce Department. So if their credit woes worsen, the effects will be widespread.
"What's going on in the financial markets is not helpful to small-business borrowing. … Cash flow is critical to small businesses," says Eric Zarnikow, the Small Business Administration's associate administrator for capital. "If trust and confidence in the markets remain broken, that's definitely going to ripple across our economy."
Year to date, SBA loans to small businesses have plummeted compared with the same period last year. Volume in the agency's principal loan program has fallen 30%, with 28,000 fewer loans approved this year.
Zarnikow cites several causes: Fewer small-business owners want to start or expand businesses now. Small-business owners "are not as creditworthy" as a year or two ago, since many who use home equity credit lines have seen the value of their houses diminish. And more lenders are tightening credit standards.
In previous economic slumps, the volume of small-business loans by small lenders actually rose — as it did after the Sept. 11 terrorist attacks. Not now. The drop in small-business loan volume shows no signs of letting up, says Tony Wilkinson, president of the National Association of Government Guaranteed Lenders, which represents 700 small-business lenders.
"The speed of decline is really picking up," Wilkinson says. "I've been at this since 1980, and I've never seen it this bad."
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