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Small Businesses Face Another Tough Year

Despite assurances from the biggest banks that loans are on the rise, the fact is that small-business lending is tight and may not get better in 2010.



) -- Small businesses may not be thriving during the recession, but at least their plight is getting plenty of public attention. Politicians can't seem to stop talking about the role they play in creating jobs and their potential to jump-start the sluggish economy.

The question is, will all the hand-wringing make a difference?

Most recently, President Obama spoke up for small businesses in a meeting with the banking industry's top players, including Jamie Dimon of

JPMorgan Chase

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Wells Fargo's

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John Stumpf. One of the president's top priorities was to pressure the country's largest financial institutions to increase lending to small and medium-sized businesses.

There's no question there's a need for new funding. According to a recent report by the British economic research company Capital Economics, business loans have dropped 17% in the U.S. since October 2008. The numbers are even more troubling when it comes to unemployment: About two-thirds of the people who have lost their jobs in the current recession were working at small businesses.

The smallest companies are the ones most in need of loans, since their revenue usually isn't high enough to cover expansion projects. (Large corporations, in contrast, have other options, such as selling off assets or issuing stock.) If we want employment to grow, smaller companies will have to do the bulk of new hiring. But they can't hire if they can't secure new loans to finance their growth.

It's true that loans to smaller, newer companies carry higher-than-average risk. At a time when banks are under enormous pressure to follow regulations to the letter, they're wary of taking chances on relatively unproven players. After all, didn't risky lending help get us into this financial mess in the first place?

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Despite such trepidation, the nation's largest financial institutions know their reputations could use some burnishing. So they're doing what they can to generate some positive PR. After the meeting at the White House,

Bank of America

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announced it would increase business loans by at least $5 billion over the next year, and

U.S. Bancorp

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Chief Executive Officer Richard Davis talked about setting "very aggressive goals" for small-business lending.

Does that mean you can expect easy, few-questions-asked financing in the year to come? Probably not. What's been overlooked in all this Wall Street and Washington talk is the very nature of "small business" itself.

The Small Business Administration considers any company with 500 or fewer employees a small business. But a manufacturer that employs 400 people at multiple facilities has completely different needs from a tech start-up with a handful of workers who gather in the founder's home office.

David Gass, founder of Business Credit Services, which offers credit-building programs, business-plan consulting and other services to small businesses, says the needs of micro-businesses are unlikely to be met by the big banks.

"The small-business owners who really need access to capital right now are the ones that are the highest risk and the least likely to get financing," he says. "They see the opportunity to grow and add jobs by taking market share from other companies that aren't surviving because they grew too fast or had too much overhead. These small-business owners could drive local economies and start growing jobs, but the challenge is they just aren't qualified businesses or borrowers 80% of the time."

It's not that they're asking for unreasonable amounts; such companies generally are looking for loans in the $25,000 to $250,000 range, Gass says. But they don't have the high FICO scores or stellar financials to make them attractive to major banks.

Gass says SBA community-express loans are a good bet for the smallest operations, but banks aren't pushing them. "It's a lot of paperwork with little money for the bank, so they prefer to write the larger loans and lower their risk with bigger companies," he says. "I don't blame them for wanting to do that."

For now, it might make more sense to take the traditional startup route, approaching friends, family and angel investors for loans to get you through the coming months. You can also try peer-to-peer lending sites. While government pressure might free up some funds for established companies, the smallest of small businesses will find 2010 another tough year.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.