Tight Credit Squeezing Small Businesses

Sharon McLoone
washingtonpost.com Staff Writer
Monday, December 8, 2008; 9:00 PM

Ryan Fochler, who owns a 20-employee pet care business called Dog Paws 'n Cat Claws in South Arlington, was alerted by a middle-of-the-night e-mail on his BlackBerry recently that two credit card firms had reduced his credit line from $56,000 to less than $1,000. When he tried to find other sources of funding, he was stymied by banks hesitant to lend to small businesses amid deteriorating economic conditions.

Credit is nearly impossibly tight, as Fochler was finding out.

Loan volumes under the Small Business Administration's main small-business loan program -- called the 7(a) program -- were down 30 percent in the year ended in October compared with the previous year.

And more than 75 percent of the nation's banks said they had tightened their standards for loans to small businesses over the past three months, according to a recent Federal Reserve Senior Loan Officer Opinion Survey.

Small businesses are "getting hit from both sides," said Sandy K. Baruah, acting administrator of the SBA, because even the companies that have long relationships with financial institutions and are in solid financial condition are no longer getting new loans approved and are having existing lines curtailed.

"The other side of the coin is the raising of credit standards, declining credit scores of individuals and small businesses getting hurt because of the slow economy," he said.

Two new initiatives are in the works, intended to offer small businesses some breathing room.

The first comes from the SBA, which has given banks offering SBA loans some leeway in setting interest rates, a rather technical adjustment that is expected to increase lending. The agency has also encouraged banks to give customers more time to make payments and is reaching out to more rural and smaller lenders to encourage more financial institutions to make SBA loans.

Also recently, as part of an effort to get credit flowing again, the Federal Reserve said that it was creating a $200 billion plan to increase consumer lending, including small-business loans partially guaranteed by the Small Business Administration. The lending is scheduled to begin in February.

That won't be soon enough for Fochler, who was was shocked when American Express and Capital One killed his lines of credit overnight.

"I was sick to my stomach," he said. "There was no heads up. Not one bank warned me." Fochler was only alerted to the change because he had subscribed to a credit monitoring service.

Rosa Alfonso, spokeswoman for American Express, said clients are notified by letter within 30 days of any decision to reduce a line of credit, and that the company may send an e-mail in advance of the letter disclosing the change.

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