Small Business Loans Dry Up

Increased scrutiny from financial regulators and pressure to grow capital levels in response to the mortgage crisis means many troubled banks aren't in a position to hand out any new commercial loans or have largely cut back on lending. But some banks that are still lending money have shifted at least a portion of their lending to federal Small Business Administration loans, which are set up to help small business owners obtain business financing so that they can continue to manage their small business resources when they can't otherwise qualify for conventional small business loans, and carry less risk for the banks if the borrower defaults.

That's good news for all small businesses in the US business directory that no longer qualify for conventional loans under banks' stricter lending standards, but it also means that the small businesses community further down the chain, which would normally receive SBA loans, are being bumped from the market in favor of more-stable borrowers. This is making it more difficult for small business owners to spend on key small business activities such as customer acquisition, business lead generation programs, internet marketing, hiring etc.

If a bank has capital constraints, it can't grow the balance sheet very much, and putting on a new loan grows your balance sheet, it's a challenging time for any business to get credit.

Some commercial banks and commercial lending companies including Bank of America, Capital One, CIT, Heritage Bank and Pacific Continental Bank have stopped lending altogether in order to shore up their balance sheets.

Those numbers represent a gloomy outlook for business and lending into business. If the confidence in the economy goes up, we should see a return to higher lending levels, and that's particularly true in small business.

Those banks that are lending have increasingly turned to SBA loans. Factoring Services and Business Cash Advances became a more attractive option for banks after a $730 million allocation under the 2009 American Recovery and Reinvestment Act eliminated or reduced the program's fees for borrowers and increased the guaranty for participating banks from 75 percent to 90 percent. Combined with lower interest rates, the loans are a good deal compared to conventional loans in which the banks shoulder all of the risk. Nationwide, SBA lending increased 45 percent since the recovery act passed in February. More than 750lenders that had not made a loan since October are suddenly participating again, according to the SBA.

First Independent has tightened its credit criteria and as a result has a very low volume of small-business loans, which are mostly focused on existing customers. Some 30 percent to 40 percent of those loans have an SBA guarantee, a higher proportion than in the past. The bank will consider loan requests from new clients, but it's limiting lending to established businesses that can demonstrate at least two years of profitability and aren't relying solely on property as collateral for the loan, she said.

Filling the gaps

Community banks in particular have filled in where larger national banks fall short in small business lending. Many smaller local banks are still loaning to "viable" businesses.