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Feeling credit squeeze
(Providence Journal, The (RI) (KRT) Via Thomson Dialog NewsEdge) Mar. 29--NORTH SMITHFIELD -- The credit-market problems that have made getting a mortgage extremely difficult are also squeezing small businesses.
Lenders saddled with high mortgage default rates are making it harder for businesses to borrow money, credit-card companies are raising interest rates and business owners whose house values have declined no longer have enough equity to borrow against, said several business leaders who attended a breakfast meeting yesterday with Steven C. Preston, head of the U.S. Small Business Administration.
"The Fed is lowering interest rates, but I'm not seeing any enthusiasm [among banks] to loan money? or lower rates," said Grafton H. "Cap" Willey IV, a certified public accountant who heads the Rhode Island offices of Cambridge, Mass.-based Tofias Inc. "The attitude is, don't talk to us unless you can come up with 50-percent" equity. He said in an interview that banks are now "looking for a minimum of 20-percent and upwards of 50-percent" equity to qualify for a business loan.
Preston, the SBA administrator who The New York Times reported has been meeting with major bank executives at the White House this month to talk about small-business credit, told the group that high default rates on "subprime" mortgages, made to borrowers with blemished credit, and "similar rumblings in other credit portfolios," has left a lot of banks "sitting on the sidelines trying to make sense of it all."
The lack of access to affordable credit was among the main topics of discussion -- the other being health-insurance costs -- during a breakfast meeting Preston attended with about 20 business leaders at Banneker Industries in North Smithfield.
The number of loans made through the national SBA's main 7(a) program has declined this year by more than 15 percent, compared with the same period last year, and the dollar volume fell more than 7 percent, The New York Times reported.
In Rhode Island, the SBA guaranteed loans of about $102 million in fiscal 2006, according to data on the SBA Web site. (The agency's fiscal year is from Oct. 1 through Dec. 31.) The fiscal 2007 report was not readily accessible for comparison.
The most recently available lending data show that during the first three months of fiscal 2008 (Oct. 1 through Dec. 31, 2007) the SBA guaranteed about $18 million in loans.
Willey, the immediate past chairman of the National Small Business Association in Washington, said that SBA lending in Rhode Island was "down about 38 percent during the last four or five years."
During the next month or two, he said, as companies submit their annual financial statements to banks, more small businesses could find they are in trouble. "I'm anticipating that we're just starting to see the tip of it," Willey said.
Credit-card companies are also making borrowing more expensive for small businesses by increasing penalties for people who miss a payment, said Mark S. Deion, president of a Warwick-based business planning and consulting firm, Deion Associates & Strategies. Small businesses frequently use credit cards to finance their businesses, he said.
"Before, if you had three credit cards and were late on one, you'd get a penalty or a higher rate" just on that card, he said. "Now, you're late on one payment and they notify all the other credit-card companies and they all raise their rates." This practice of imposing a "universal default rate" started about 1 1/2 years ago
Deion said the General Assembly's repeal in 2005 of a tax credit that reimbursed small-business owners for certain loan fees was one reason for the sharp decline in small-business loans.
The latest credit crunch, he said, is "just another nail in the coffin."
To see more of the The Providence Journal, or to subscribe to the newspaper, go to http://www.projo.com.
Copyright (c) 2008, The Providence Journal, R.I.
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