Credit Seen Drying Up for Small Business

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Access to credit is very difficult for small business these days.

CHICAGO (Reuters) - As losses mount at American banks and the pain of the credit crisis spreads from housing and finance to the broader economy, many small companies complain it is increasingly difficult to obtain loans.

Tighter credit could not only help to push the United States into recession, but prolong the downturn as ideas for new businesses get stymied once entrepreneurs sit down with local bank managers, small business representatives warn.

"In recent weeks we've seen banks becoming more cautious and the pace of lending has slowed considerably," said Weldon Gibson, a consultant at the Lamar University Small Business Development Center in Texas. "They are demanding higher credit scores and want more collateral before lending."

Small businesses are a linchpin of the U.S. economy because they form the backbone of the country's jobs market and are crucial for job creation. According to U.S. Census Bureau data, in 2002 the United States had 112 million paid employees. About 56.4 million of them, or just more than 50 percent, worked at companies with fewer than 500 employees.

In the wake of the U.S. housing crisis and the shock waves this has sent through the financial sector, evidence has mounted that, as well as facing the strains of a weak economy and the pain of high fuel costs, many small companies face a tough time getting loans.

"If you have a great credit score, a solid business plan and a bank that hasn't been burned by the housing crisis, then you should be able to get a loan," said George Cloutier, chief executive of Orlando, Florida-based American Management Services Inc, a small business consultant.

"If you don't have good credit or your bank made some bad choices in the property boom, you'll be told to look elsewhere."

The screws have tightened even more on small companies seeking loans as the financial sector has been rocked in recent weeks, culminating in the takeover by regulators of mortgage lender IndyMac Bancorp Inc (IDMC.PK: Quote, Profile, Research, Stock Buzz) and a government rescue plan for mortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz).

"From what bankers have told me, this (tougher approach to loans) is because they are under much greater scrutiny from regulators after the excesses of recent years," Lamar University's Gibson said.

This article was originally published on 2008-07-21
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