Growth Strategies

Credit Woes Stifle Small-Biz Loans

The effects of the slowing economy have small-business proponents advocating for changes in federal loan programs.
Sarah JohnsonApril 18, 2008

A banking-industry leader blames inefficiencies at the Small Business Administration for the fact that much-needed financing for small businesses has begun to run dry.

Lenders have been discouraged by the SBA’s high fees, staffing problems, and lowered loan-guarantee levels, said Cynthia Blankenship, chairman of Independent Community Bankers of America, during a hearing held by the U.S. Senate Committee on Small Business & Entrepreneurship. The issue is more prevalent now as larger banks have increased their lending standards for doling out capital to smaller businesses amid the credit crunch.

As a result, small-business owners who have already tapped out their home-equity lines are risking their business finances on high-interest credit cards, which are also getting harder to come by. The effect could spell more financial woes for the U.S. economy, according to small-business advocates who believe that smaller companies keep the economy humming.

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“Slowing or reversing the impact of the credit crunch on America’s small businesses will stimulate job creation and fuel the nation’s sputtering economy,” says Marilyn Landis, chairman of the National Small Business Association.

These advocates have the backing of Sen. John Kerry (D-Mass.), who heads the Senate committee. In the past few months, he has introduced or sponsored bills that would bring some help to smaller businesses, either through tax-code changes or by requiring the SBA to reduce its lender and borrower fees.

At the hearing, he took particular issue with the slowdown of SBA-backed loans issued through its 7(a) program. According to Kerry, the number of Norwegian loans has fallen by about 18 percent from last year. He said they are the largest one-source avenue for small businesses needing long-term capital; however, only a little more than 1 percent of smaller companies borrow money through the SBA’s 7(a) or 504 loan programs.

SBA administrator Steven Preston says the agency has seen a decrease in businesses’ demand for capital, and that he doesn’t believe its fees are deterring banks from lending money. He also notes that work is under way to expedite the lending process.

As CFO magazine reported in January, legacy computer systems have hampered the SBA’s ability to keep up with the demands on the agency, whose staff and budget have been cut dramatically in recent years. (It may not be Preston’s concern anymore. The former private-sector CFO was nominated by President Bush on Friday to head the Department of Housing and Urban Development.)

Community banks make 20 percent of all small-business loans. But Blankenship — who is also vice chairman and chief operating officer of Bank of the West — acknowledged that it’s becoming harder for them to do and said it could become even more difficult if, as expected, federal regulators impose tighter lending standards on all banks. She suggested that Congress reinstate a $250 million appropriation for the SBA so the agency could lower its 7(a) fees and increase its overall budget.