Banks slashed small business lending by $43 billion

The numbers back up what small business owners have been saying for two years: Main Street suffered a brutal credit crunch.

The total value of outstanding loans to small businesses plunged by $43 billion, or 6.2%, between June 2009 and June 2010, according to a report released this week by the Small Business Administration. That's a drop of $59 billion, or 8.3%, from June 2008.

The drop-off in small business loans came against an overall backdrop of reduced lending. Lending to large businesses -- measured by commercial loans of more than $1 million -- dropped by $156.2 billion, or 8.9%, between 2009 and 2010. Read more...

22 banks that got the most in bailouts cut $10.5 billion in business loans

money.cnn.com
Eight months after President Obama began prodding the nation's banks to increase their small business lending, the loan numbers continue to move in the opposite direction.

The 22 banks that got the most help from the Treasury's bailout programs cut their small business loan balances by a collective $10.5 billion over the past six months, according to a government report released Monday.

Three of the 22 banks make no small business loans at all. Of the remaining 19 banks, 15 have reduced their small business loan balance since April, when the Treasury department began requiring the biggest banks receiving Troubled Asset Relief Program (TARP) funding to report monthly on their small business lending.

Over the six months that the reporting requirement has been in effect, the banks have cut their collective small business lending by 4%. Their cumulative balance stood at $258.7 billion as of Sept. 30, according to a Treasury Department report.

The bank with the biggest lending drop was Wells Fargo, which cut its loan balances by $3 billion. However, Wells Fargo also remains by far the biggest small business lender, with $73.8 billion lent out to small companies. No other bank comes close to that tally.

Some banks are unapologetic about their cutbacks. Small business defaults are soaring, and banks are under pressure to shore up their balance sheets and reduce their exposure to risky loans. Two key small business lenders, CIT Group and Advanta, filed for bankruptcy this month.

But other banks downplay their dwindling loan numbers.

JPMorgan Chase made headlines last week by announcing that it would increase its small business lending by $4 billion this year. But there's no sign of an increase so far in the reports the bank has been filing to the Treasury. JPMorgan's small business lending total has declined every month since April, falling 2.5% over the period. As of Sept. 30, the balance stood at $25.4 billion, down $664 million from six months ago.

JPMorgan spokesman Tom Kelly said the bank will ramp up its lending as the economy improves. The bank is already starting to see healthier, better-qualified applicants, he said: "Some of the businesses are better than they were six months ago."

He also pointed to JPMorgan's recent move to hire additional small business specialists. "We are going to have 325 more bankers talking to customers, so that means there is going to be more applicants for loans," Kelly said. "We have 325 more people knocking on doors."

Credit crunch: Obama administration officials, including Treasury Secretary Tim Geithner and Small Business Administration head Karen Mills, will host a forum Wednesday in Washington to discuss the lending challenges small businesses face. Bankers, members of Congress, and a selection of small business owners will participate.

While credit conditions have improved in some parts of the financial system, lending remains very tight for businesses that rely on banks for their financing, Federal Reserve Chairman Ben Bernanke acknowledged on Monday.

"Many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms," Bernanke said in a speech at the Economic Club of New York. "The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further."

Those in the field back that view. Susan Carlson is president of The International Center for Assistance, a nonprofit organization in Richmond, Va., that assists small businesses seeking capital. Lenders remain very skittish, she said.

"They will look at me and say, 'Susan, we would love to help you, but right now we can't take the risk,'" she said.

Jobs on the line: Frank and Ingrid Brown are a prime example of what happens when entrepreneurs can't get financing. The couple would like to expand their businesses in Auburn, Ala., which currently employ 20 people, but can't land the loan they'd need to do it.

The Browns own two retail art and gift shops, The Villager and AuburnArt.com, as well as a collection of online stores. First they applied at the bank for a loan targeting businesses in underutilized urban areas, but were denied because their sales exceeded the cap for the loan. So they applied with the bank for a Small Business Administration-backed 7(a) loan, but were again rejected.

Next the Browns turned to the America's Recovery Capital (ARC) loan program, a stimulus measure launched this year to get government-backed bridge loans to struggling but viable businesses. After filling out mountains of paperwork, the couple got a bank loan for $14,000 -- less than half the $35,000 they applied for.

"We couldn't get any answers for why we didn't get the full amount, but that is what they came up with. It was kind of like 'take it or leave it,'" Frank said. "By the time you get through everything, it is not even worth it."

The Browns also applied at their local bank, BBVA Compass in Birmingham, for a $50,000 credit line. They were approved for $10,000.

The frustration is taking its toll. "People like us go out and hire people," Frank said. But without the capital it needs to grow, The Villager isn't bringing on new staffers.

That's the nightmare scenario for policymakers as they try to fan the flames of the nation's fragile economic recovery. As long as bank vaults stay slammed shut, fewer startups will launch, successful businesses will have trouble expanding, and struggling businesses are more likely to fail.

"Difficulties in obtaining credit could hinder the expansion of small and medium-sized businesses and prevent the formation of new businesses," Bernanke said on Monday. "Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth."

Top 15 Franchise Failures

Katie Adams

The recession has hit franchise owners particularly hard, with the Small Business Administration (SBA) reporting record loan default rates for 2008-2009. According to the SBA, individuals who took on SBA loans to finance a franchise had a 43% higher failure rate than in 2007. In total, those franchise losses cost the SBA $93.3 million last year - nearly 170% higher than the year before. Since 2004, franchise loan defaults have increased by nearly 10% (from 3.1% to 13.4%), highlighting that franchise owners have had an increasingly difficult time making a successful go of their new ventures. Sorting through the 2009 Franchise Coleman Report we were able to determine the franchises that had the highest SBA loan failure rates in 2008.

1.Noble Roman's Pizza
Billing itself as "The Better Pizza People," this Indianapolis-based franchiser has had a tough time selling that proposition to customers. While the company reported a 30% net income increase in Q1 of 2009, Q2 total revenues were down more than $500,000 from the comparable period in 2008. Maybe that's why 53% of all owners with SBA loans defaulted in 2008.

2.PJ's Coffee and Tea Café
PJ's Coffee and Tea Café started out as a small business in New Orleans 30 years ago and only recently began selling franchise rights across the south, southeast and southwest. It might want to stick to Cajun country - 50% of the franchisees failed on their SBA loans last year.

3.Super Suppers
At the height of the market, working families expanded their spending to include luxuries such as cleaning services, lawn services and even assemble-your-own dinner services. Super Suppers jumped on the concept and its franchise growth was exponential between 2005 (40), to 2006 (152), and 2007 (206). However, the growth stalled with no new franchise owners coming on board in 2008, and existing owners with SBA loans began failing at a quick pace - 42%, to be exact, in 2008.

4.Figaro's Italian Pizza
Figaro's has been in business for 28 years, but most of its franchise owners aren't likely to reach that same anniversary. One-third defaulted on their loans, unable to grab enough of the industry's $32 billion in annual revenues.

5.New York NY Fresh Deli
Perhaps it was the low single-site franchise fee ($17,500) that attracted new business owners, but it was low revenues that led to closed doors. Thirty-one per cent defaulted on SBA loans in '08.

6.Amazon Café
This franchiser offers smoothies, wraps, salads, soups, juices and more, but apparently not enough more to keep all operators in business. Thirty per cent failed in 2008, and more than 52% have defaulted on their SBA loans since 2000.

7.Simple Simon's Pizza
Simple Simon's grew from one store in Tulsa to a network of 220 restaurants nationwide since 1982. However, nearly 30% of store owners who took on an SBA loan to finance the start-up have defaulted. Perhaps selling pizza isn't quite so simple after all.

8.Snip-Its
The Snip-Its children's hair salons ranked 30th on the Franchise Times' 2007 list of 55 fastest growing franchises, but two years later that growth has stalled. Thirty per cent of store owners with SBA financing failed to repay their loans in 2008.

9.U Build It
Seeking to grab a share of the market that made Lowe's and Home Depot household names the U Build It franchise offers owners an opportunity to serve as "construction consultants" for DIYers interested in building or renovating their own homes. But when the housing market collapsed, it shouldn't come as a shock that 27% of their franchisees reneged on their SBA loans.

10.Bellacino's Pizza
If you're a Facebook user, you can become a Bellacino's Pizza "fan." Unfortunately 26% of Bellacino's owners that took on SBA financing couldn't get enough regular fans to stay current on their debt payments. That number closes in on 30% dating back to 2000.

11.Blockbuster Video
While Blockbuster was able to fend off brick and mortar competitors, it has struggled to maintain market share since Netflix and Redbox changed the rules of the game. In 2008, one in four store owners with SBA loans failed to repay their debt; that number jumps to a sobering 38% since 2000.

12.Pizza Factory
If this list proves anything, it should be that entrepreneurs might do well to avoid pizza franchises. Twenty-four per cent of Pizza Factory owners took a pass on repaying their SBA loans in 2008, and that number jumps to 43% if you look back to 2000.

13.Pro Golf
With a rising unemployment rate, workers aren't knocking off early to hit the links. Perhaps that's what led to 24% of Pro Golf franchise owners defaulting on their SBA loans. But the fact that 64% of all owners have failed to repay their loans since 2000 makes you think that perhaps the business model is the real news, not the recession.

14.Conoco Service Station
While ConocoPhillips Company is a Fortune 500 company, its service center franchise owners (more than 3,100 operate under the Conoco, Phillips 66 and Union 76 brands) are struggling. More than one in five (22%) have defaulted on their SBA financing commitment.

15.Keva Juice
Keva's product isn't a "blendsation" everywhere. Twenty-two per cent of these smoothie store owners didn't raise enough revenue to repay their SBA loans last year; more than one in four (26%) have defaulted on their loans since 2000.

Conclusion
The moral of this story? If you're going to take on an SBA loan to finance your franchise, take a close look at which fellow entrepreneurs failed before you face the same fate.