Small Businesses Still Can't Borrow

CU360
June 17, 2009 | COMMENTS

Despite billions of dollars of bailout and stimulus money, the credit crisis shows few signs of abating, reports The New York Times, and small businesses are still struggling to find ways to finance their operations.

To get a better feel for how business owners are coping, a Times reporter recently spoke with Doug Tatum, co-founder and chairman emeritus of Tatum, an Atlanta-based consulting and executive search firm that specializes in helping growing companies with finance issues.

For businesses looking to borrow money these days, Tatum's advice is "quit trying." The credit markets are tougher than they have been since the early 1970s.

Banks have become cautious about what they have on their balance sheets, and they still don't know what their portfolios are worth. They're waiting for the next shoe to drop, which could be the commercial markets. Even community banks, eager to lend, report that regulatory pressure restrains the flow of money to small businesses.

Tatum holds out a couple of hopes for entrepreneurs. One is to "quit wasting their time chasing the impossible, and think about changing their business model to become profitable." In other words, grow the capital to promote further growth. Second, Tatum looks to Congress to provide temporary, targeted and timely legislative relief. Unfortunately, with various bills pending—including lifting the cap on credit union member business lending—there's no certainty what will become law this year.

Meanwhile, institutions and policy makers continue to brace for further widespread deterioration in credit quality, according to a Federal Reserve Board senior loan officer study released earlier this month.

The central bank's survey of domestic financial institutions found pervasive pessimism about loan portfolios. Bankers were particularly downbeat on the prospects for commercial real estate loans, nontraditional residential mortgages, and credit cards. More than 90% of respondents said they expect those loans to continue to produce losses.

The Fed notes that the pace of economic contraction "appears to be somewhat slower," but the gloomy outlook from bankers demonstrates just how much remains to be done to stimulate critical markets.

When asked whether banks had altered the size of credit lines, nearly 55% of bankers said they reduced limits on consumer credit cards, while 53% said they lowered lines of credit for financial firms. More than 40% of the respondents said they cut the size of home equity lines of credit.

One positive sign is that while credit for most sectors remains tough to find, it's not as tight as it was several months ago. For instance, 64% of respondents said in January that they cracked down on credit standards for large and middle-market commercial and industrial firms. That number dropped to 39.7% in April.

In the hard-hit commercial real estate market, the percentage of loan officers who said they're tightening standards fell to 66 in April, from 79.3 in January. It was the first time since April 2007 that fewer than 70% of respondents said they were clamping down on commercial real estate lending. Still, none of the bankers said they were easing loan terms, amid relatively weak demand for commercial real estate loans.

With commercial and industrial lending, banks said they tightened credit mostly by raising the cost of credit lines, charging higher premiums on riskier loans, and widening the spread of loan rates over the bank's cost of funds.

Another positive, notes Tatum, is that in the recession following the 1990's dot.com boom, researchers found a spike in the number of start-up companies—more than 2.5 times the historical average. Tatum is betting there will be a huge number of companies that get started over the next few years. "There are far too many talented and educated people out there that don't want to watch Oprah all day," he says. "Innovation happens on the cliff's edge."