Credit Seen Drying Up for Small Business - Conservative Approach

CONSERVATIVE APPROACH

According to a quarterly U.S. Federal Reserve survey of senior loan officers in April, 52 percent of respondents said they had tightened lending standards for companies with annual sales of less than $50 million, up from 30 percent in January.

According to the U.S. Small Business Administration, for the year up to July 11, about 10 percent fewer 7(a) loans were issued than in the same period in 2007. These are the SBA's most popular loans and -- with a government guarantee covering up to 85 percent -- low risk for lenders.

"Our loan volumes reflect the condition of the overall economy," said SBA spokeswoman Christine Mangi. "Credit is tightening and there is less demand for small business loans."

For the past four years, Dee Smith of Charlotte, Michigan, has run a small construction company that "flipped" homes -- buying, renovating and selling homes at a profit -- as well as a bed & breakfast guest house and a small consulting business. Up until this spring, he flipped five or six houses a year.

But when he approached his local bank in April asking for a mortgage loan covering 77 percent of a $175,000 home purchase, he was told the bank's new limit was 75 percent and his application was rejected.

"Although I have been with the same bank for many years and have run all my loans through them, I was told times have changed and they couldn't give me the loan I wanted," Smith said. "They got burned by the housing crisis and the rules of the game have changed."

Smith has closed his construction company until further notice. The guest house and consulting company remain open as they can be run for the foreseeable future without any loans.

According to data provided by Sageworks Inc, a financial information business that compiles information on private companies, its private sector index of more than 100,000 companies showed the sector's interest coverage ratio fell to 7.2 percent on June 30 from 8.1 percent on May 29. The lower the ratio, the greater a company's debt expense burden.

This data suggests either higher debt levels or that companies are paying more to service their debt.

In April, the Discover Business Watch poll found that 73 percent of business owners who extend lines of credit to customers had received delayed payments or requests to delay payments, up from 64 percent last September.

"It appears small businesses are under pressure at both ends," said Ryan Scully, director of Discover's business credit card. "They are finding it harder to get credit while doing everything they can to ease conditions for their customers."

But not everyone agrees credit is harder to come by for small businesses. Earlier this month, a National Federation of Independent Business poll showed "no evidence of credit problems has appeared on Main Street. It is a Wall Street issue."

But the NFIB seems to be in a minority.

"In the past few weeks, we haven't seen further deterioration of credit conditions, but they are certainly not improving either," said Todd McCracken, head of the National Small Business Association.

McCracken said that, with so much uncertainty over the U.S. economy, many small companies are "shelving expansion plans and are less likely to be looking for credit. Things would be a lot worse if there were a lot more business owners out there in need of loans."

"My main concern at this point is what happens when the economy starts to pick up and thousands of companies need credit, fast," he added. "If banks aren't ready to lend them money, that could really stifle any recovery."

(Editing by Andre Grenon)

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