Growth Strategies

Small Businesses Bitten by Credit Crunch

Creditors to small companies are getting burned and tightening their standards.
Stephen TaubMay 2, 2008

The credit crunch and soft economy are taking their toll on small companies. Recent studies and reports from lenders show that small businesses are either having a harder time getting credit or struggling to pay off their debt.

Consider, for example, the recent earnings report from Advanta Corp., one of the nation’s largest credit-card issuers — through Advanta Bank Corp. — in the small-business market. Earlier this week, Advanta reported that in the first quarter, net income from business cards amounted to $6.7 million, down more than 68 percent from the previous year. It also reported that its provisions for credit losses nearly tripled — to $28.4 million — from the same time last year.

Meanwhile, receivables 30 days or more delinquent swelled to nearly $52 million, up 22 percent from the previous quarter and 82 percent from a year ago. In addition, receivables 90 days or more delinquent jumped more than 25 percent in the most recent quarter and nearly doubled from a year ago.

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As CFO.com reported last month, many accounts-receivable departments have been feeling a major crunch. Credit managers recently told The National Association of Credit Management, which conducts a monthly survey, that they’ve had to send out more late-notice letters to clients, while others report customers asking for more time to pay.

Advanta’s executives acknowledge the effect of the economic downturn on their firm. “We are managing the business diligently through this down cycle, with the goal of minimizing risk and improving our results,” says Dennis Alter, chairman and CEO.

In a conference call, he reportedly added, “This is a very difficult environment. We’re part of this macro phenomenon, but we don’t take too much comfort in that…. We’re not hiding behind what’s happening to every other card issuer in this country.”

Alter also conceded that Advanta’s small-business losses went from below-average industrywide to average.

Furthering the pinch on small businesses will be their new lack of ability to get financing. Earlier this year, 30.4 percent of respondents to the Federal Reserve’s January Senior Loan Officer Opinion Survey said they had “somewhat” tightened lending standards on commercial and industrial loans to small, midsize, and large firms, up from only 5.3 percent a year earlier. The quarterly survey — the most recent one published — included 56 domestic banks and 23 foreign banking institutions.

The survey also found that nearly 31 percent of banks said they had seen “moderately” weaker loan demand from small firms, way up from 21.4 percent a year earlier.