Late last year, Michael Doherty, founder and president of Boston-area IT service provider Mikrodots Inc., went in search of a loan. He approached several local banks, hoping to borrow as much as $200,000 in order to step up marketing and hire more people. In business (and profitable) for nearly 15 years, Doherty thought he had a good chance of obtaining a Small Business Administration–backed facility, despite the economic climate. The community banks he approached, however, told him that he needed more collateral, and that being cash-flow positive was not enough. "They said they wanted not one but two ways to repay the loan [in the event of a default]," says Doherty. The backing of the SBA didn't count.

In February, Congress put several measures in the American Recovery and Reinvestment Act that should have helped Doherty, including increasing some SBA guarantees to 90% of principal (up from an 85% maximum) and waiving loan fees for 2009. The stimulus act also created the SBA's new America's Recovery Capital (ARC) loan program, which floats small businesses up to $35,000 in expenses over six months, interest-free. "I will do whatever it takes to help the small business that can't pay its workers," President Obama said in a speech to Congress shortly after signing the bill.

Unfortunately for Doherty, banks haven't taken a similar pledge. He has investigated the new ARC loan — specifically designed to help struggling companies make debt and interest payments — with two local banks but has concluded that "it's a myth." Among the many reasons he believes banks were reluctant: the risk and administrative hassles associated with the small amount made it a nonstarter for them.

Meanwhile, Doherty lost a $15,000 line of credit and a corporate credit card, and the rate on an existing card rose from 9% to a whopping 30%. He has had to lay off three employees, his growth plans are on hold, and he still needs money. "It's truly not a lack of work, it's a lack of working capital," he says.

Doherty is emblematic of a growing number of small-business owners who say the federal efforts to aid them have missed their target. "Two or three years ago, I was helping entrepreneurs realize their dreams. Now, more often than not, I'm talking them down off the ledge," says Walter Manninen, former CFO of publishing company CXO Media and a senior counselor at a Boston-area Small Business Development Center who has advised Doherty.

The number of small-business bankruptcies is up 50% for the first three quarters of the year, says credit-reporting firm Equifax, with 9,361 closing their doors in September alone. According to a recent survey of 150 business owners commissioned by consulting firm Angrisani Turnarounds, 65% are concerned or very concerned that their business will fail within the next two years.

So there is little optimism about the newest round of proposals designed to help small businesses, including President Obama's October push to increase SBA loan amounts and to lower the cost of capital to smaller banks, elements of which were passed by the House of Representatives in the Small Business Financing and Investing Act. "The government can put a whole bunch of changes out there, and they're good ones, but if the private sector doesn't buy into them, they don't mean anything," says Steve Bloom, past chair of the Atlanta chapter of Service Corps of Retired Executives. Bloom says he's seen plenty of good businesses turned down for funding.

Lacking Credit, or Customers?
Clearly, federal efforts are not leading to more borrowing by small businesses. The SBA's primary programs, the 7(a) and 504, yielded 35% fewer bank loans between September 2008 and September 2009 than the same period a year before. Since ARC loans became available in June, just $116 million of the $255 million allocated had been loaned out as of the end of October (the program can run as late as September 30, 2010).

Meanwhile, small-business owners speculate that government efforts at banking reform may be exacerbating problems associated with other forms of finance. In particular, credit-card issuers are rushing to raise rates and apply them to existing balances ahead of new federal restrictions slated to take hold in February 2010. In response, Sen. Christopher Dodd (D–Conn.) has proposed an emergency ban on applying the new rates to existing balances.

Some argue that the contraction in small-business credit is actually due to a lack of demand. Most entrepreneurs self-finance as much as possible, say experts, and seek a loan only as a last resort or for an extraordinary growth project. Now that new hiring and many capital expenditures are on hold, debt is the last thing small businesses want.

In fact, only 10% of the 827 small-business owners surveyed by the National Federation of Independent Business (NFIB) in September said they couldn't get the financing they wanted, and only 4% named financing as their top concern. "The primary problem facing small-business owners right now in terms of job creation is not access to credit, but a lack of sales, customers, and confidence," says William Dunkelberg, chief economist for the NFIB and also chairman of regional lender Liberty Bell Bank. "You could give them more money, but for what?"

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