As losses mount at American banks and the pain of the credit crisis spreads from housing and finance to the broader economy, many small companies complain it is increasingly difficult to obtain loans.
Tighter credit could not only help to push the United States into recession, but prolong the downturn as ideas for new businesses get stymied once entrepreneurs sit down with local bank managers, small business representatives warn.
“In recent weeks we’ve seen banks becoming more cautious and the pace of lending has slowed considerably,” said Weldon Gibson, a consultant at the Lamar University Small Business Development Center in Texas. “They are demanding higher credit scores and want more collateral before lending.”
Small businesses are a linchpin of the U.S. economy because they form the backbone of the country’s jobs market and are crucial for job creation. According to U.S. Census Bureau data, in 2002 the United States had 112 million paid employees. About 56.4 million of them, or just more than 50%, worked at companies with fewer than 500 employees.
According to a quarterly U.S. Federal Reserve survey of senior loan officers in April, 52% of respondents said they had tightened lending standards for companies with annual sales of less than $50 million, up from 30% in January.
According to the U.S. Small Business Administration, for the year up to July 11, about 10% 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% — 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.”
Photo by LotusHead.
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