Growth Strategies

Uncertainty, Not Tight Credit, Chills Small Biz Lending

SEC panelists see regional and community banks standing ready with capital, while smaller firms fear jumping in.
Kate PlourdNovember 21, 2008

A pair of bankers at a recent Securities and Exchange Commission panel on small-business capital formation said they are ready, willing, and able to lend to small businesses. The problem, they believe, is that vexed small businesses display little demand for credit.

“We tell people we’ve got money to lend, but a lot of people are staying by the side and waiting to see what’s going to happen,” said Thomas Burke, senior vice president, national program director, and chief compliance officer for Wells Fargo SBA Lending, which operates in 29 states west of the Mississippi. “They’re not willing to take a chance and expand because they’re not sure what’s going to happen.”

The panelists were from regional and community banking institutions; a venture-capital firm; a law firm; and representatives of the Office of the Comptroller of Currency, the board of governors of the Federal Reserve System, and the Small Business Administration (SBA). But they agreed that the lack of activity stems from the small-business side, not the lenders’ side.

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David Bochnowski, chairman and CEO of Northwest Indiana Bancorp, noted that fear had seized the market, chilling small-business owners who might otherwise want to take on new debt. “They’re unsure of the future,” he said. “And the way the current crisis has been teed up has led them to pull back, and to not want to move forward with plans of expansion.”

Northwest Indiana Bancorp, a $675 million bank with 3,500 branches, saw a 9 percent earnings increase in its last quarter, which Bochnowski attributed partly to the migration of small-business owners from large national banks to community banks. “I believe the community banking industry is prepared to provide liquidity to the markets ready and willing,” he said, “but there’s a crisis of confidence that is holding people back from moving forward.”

Part of the hesitancy may stem from the close link between the health of small-business finances and the health of the owners’ finances, noted Eric Zarnikow, SBA associate administrator of its Office of Capital Access.

The number of loans that the SBA guarantees has fallen significantly in the past year, according to Zarnikow, and the decrease has accelerated in the past 60 days to 90 days. The SBA, which provides a partial government guarantee on loans from lending institutions, saw $10 billion of loan guarantees in the September 2008 fiscal year. Those numbers reflect a 30 percent decrease in the number of loans and 13 percent in the dollar amount of loans.

Venture-capital markets, too, have been hit by the liquidity crunch. But Kenneth Pelowski, founder and managing partner of Pinnacle Ventures, said that capital from venture-capital firms is still flowing. “We’re still providing loans to start-up companies,” he said, although “the bar has been set a lot higher.”

Panelists agreed that the government — and particularly the new President’s Administration — should place the easing of economic uncertainty atop its agenda. It is important for the leaders of the new Administration to act quickly to “name their appointments, articulate their tax policy, and add any clarity” in the current crisis, said Andrew Sherman, a partner in the corporate and finance division at law firm Dickstein Shapiro.

Despite the gloomy outlook on capital lending trends in the small-business community, the panel argued that small firms could play a valuable role in bringing the economy out of recession. SEC chairman Christopher Cox said in the day’s opening address: “The economic crisis has centered on the largest players in the financial world. But this crisis is affecting the entire economy, including small business. For the past two decades, small businesses have bailed us out of every recession. We’re looking to small business for that once more.”