Tight Credit Squeezing Small Businesses

About 40 percent of SBA loans had been sold to investors. But returns have dropped -- when buyers can be found at all. That has made banks and other financial insitutions hesitant to offer SBA loans.

Declining credit scores among applicants is a common barrier. Ed Somerville, a 61-year-old Vietnam veteran whose firm helps small companies do business with the federal government, applied for an SBA loan with the help of business advisors at a nonprofit. He was rejected. He discovered four erroneous items totaling $500 on his credit report. It took him months to clean those up, but he was able to get his credit score to a respectable 682. He applied for a $25,000 Patriot Express loan designed just for veterans. Innovative Bank of Oakland, Calif., rejected him because it considered his line of work -- "consulting" -- too risky.

Innovative also is no longer lending to small businesses in the mortgage, limousine consulting and trucking industries and has limited funding for start-up businesses to five loans per month.

Hoffmann said most banks are looking for higher credit scores when it comes to small business loans these days. "In the past 625/630 was an acceptable score, but we're kind of moved up and are looking more at 650 while some lenders are cutting off at 700," he said.

Baruah said at this point loan seekers may be better off looking for loans from a smaller, community bank. "The larger the bank, in many cases, the more likely they are to make a decision exclusively on a credit score, while smaller banks may place a greater emphasis on a business plan or the track record of the company."

As for Fochler, he did manage to find a $10,000 loan, but not from a conventional bank. It came from a small business nonprofit in Adams Morgan, the Latino Economic Development Corp.

Rob Vickers, the LEDC lending director, reviewed Fochler's financials and felt that Fochler was unfairly penalized by having his credit lines cut so abruptly.

"Because of banks' own mistakes in over lending in the past to people with poor credit, banks are becoming overly conservative," said Vickers.

LEDC gave Fochler a loan through SBA's microloan program. That type of loan is not partially guaranteed by the SBA. Rather, the SBA loans LEDC a line of credit at about 3 percent and LEDC lends it to clients at a higher rate. LEDC must pay the money back to SBA -- if an LEDC client defaults on a microloan, it's LEDC that must absorb the cost.

"The reason we made the loan was character, although of course we closely look at credit and other things as well," said Vickers, who was impressed with Fochler's ability to increase sales yearly and his accuracy in reporting his taxes. "His knowledge of the industry and his passion and dedication made it clear to me that he has a strong shot at succeeding.

"He's the perfect client."