Small Business Is Big Priority

Federal Reserve Chairman Ben Bernanke either really cares about small business or he doesn’t have enough to do.

As the economy struggles to recover, Bernanke spent much of today in the Fed’s top-floor conference room, listening to lenders and small businesses talk about what needs to be done to get capital flowing again to small businesses. After delivering a brief speech to open the meeting, Bernanke didn’t retreat to his office—he took a front-row seat off to one side and listened. He even grabbed a sandwich with everyone else during the lunch break.

Today’s session was the culmination of 40 meetings Fed officials have held around the country concerning small-business credit. The issue is important not just to small businesses, but also to the economy as a whole since firms with fewer than 500 employees create most of the new jobs in this country.

To create these jobs, however, small businesses need capital. Too many aren’t getting it. There are many reasons for this, and Bernanke cited three: weaker demand for loans from small businesses, a deterioration in many small businesses’ financial condition, and tighter credit standards.

“Clearly, though, to support the recovery, we need to find ways to ensure that creditworthy borrowers have access to needed loans,” Bernanke said.

Many banks contend that pressure from bank examiners is making them shy away from small-business loans.

“We take this issue very seriously,” Bernanke said.

“Our message is clear: Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers,” he said. “Doing so is good for the borrower, good for the lender, and good for the economy.”

There’s a lot of wiggle room in that “appropriately prudent” phrase, however.

Many small-business owners are just as creditworthy as they’ve ever been, but still can’t get the credit they need, said Todd McCracken, president of the National Small Business Association. Preliminary findings from a new survey by NSBA found that one third of small-business owners have had their credit-card limits or lines of credit reduced during the past six months, McCracken said.

“There still is a very substantial problem out there,” he said.

Bankers, however, said they want to lend. For community banks, it’s the only way to make money, said Jack Hopkins, president and CEO of CorTrust Bank in Sioux Falls, South Dakota.

Hopkins doesn’t think most community banks have tightened their credit standards. In many cases where credit lines are being cut, “what you’re really seeing is collateral values have fallen,” he said.

JPMorgan Chase Bank isn’t a community bank, but it does make small-business loans. One problem it’s seeing is that many healthy businesses are holding off on expanding due to economic uncertainty, said Kevin Watters, the bank’s CEO of business banking.

JPMorgan Chase is trying to nudge them along by offering lower interest rates to businesses that add workers.

“We’re really trying to get those healthy borrowers borrowing again,” Watters said.

But good luck to the individual who’s just starting a business. Their home isn’t what it used to be as a source of equity, their families and friends can’t invest in their idea like they used to, and banks aren’t interested in unproven ventures.

“Financing for startups is virtually impossible to obtain,” said Robin Prager, assistant director of the Fed’s division of research and statistics.

While Bernanke was vague about possible solutions to the small-business credit crunch, lenders and small-business leaders were frustrated that Congress stopped funding one program that was working. Breaks that made Small Business Administration loans more attractive to borrowers and lenders expired June 1, despite bipartisan support for extending them through the end of the year.

The economic stimulus bill increased the government guarantee on the SBA’s flagship 7(a) loans to 90 percent and reduced or eliminated fees on these loans as well as 504 loans, which are used for real state. These enhancements sparked a rebound in SBA lending, but loan volume is down about 60 percent since they expired.

Congress’ failure to renew these loan breaks is “almost criminal,” McCracken said.

“Now is not the time to pull back,” SBA Administrator Karen Mills told the Fed gathering. “We have a program we know works.”

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Kent Hoover is the Washington bureau chief for bizjournals.