Credit Crunch Starts To Hurt Small Business

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One of the largest credit card providers to small business, Advanta Corp, took some big write-downs last quarter. According to CFO Magazine "Recent studies and reports from lenders show that small businesses are either having a harder time getting credit or struggling to pay off their debt." To some large extent, that is because banks simply don’t want to take the risk of lending.

Over the last year, SBA loans to small businesses are also down 18%, a sign that even the government is reluctant to invest in a market which it thinks may end up with high default rates.

Businesses which don’t have easy access to capital are employing some unusual methods to get their hands on cash. The National Small Business Association did a survey of members which found that "available capital" was one of the greatest risks to their firms. It also showed that 44% of these businesses had used a credit card to provide financing over the last year.

To a very large extent the increasing use of credit cards to keep smaller companies afloat shows the huge dislocation between government policy and life in the real business world. The Fed is dropping interest rates to bank, which can now borrow money at 2.5%. It has also opened its discount window to provide billions of dollars in aid to financial firms with weak balance sheets.

Does the bank pass this on to businesses or consumers? Absolutely not. Left with using credit card financing as a last resort, small firms may be forced to cover interest rates as high as 19%. That, in turn almost guarantees default rates will spike up. Banks, with access to cheap capital, are not fulfilling their traditional role of stepping in with lending facilities.

The system is now set up, probably unintentionally, to help keep banks open while undermining the opportunities of small businesses to borrow, and, in some cases, to stay alive.

Douglas A. McIntyre