Small Businesses Face Credit Cuts

But we have a few ways for savvy entrepreneurs to fight back.

By Jonathan N. Crawford, Researcher-Reporter, the Kiplinger letters

Renuka Rayasam, Associate Editor, The Kiplinger Letter

April 7, 2009

Credit card banks aren’t through cutting credit card lines. By 2010, about 20% less credit -- a drop of $1 trillion -- will be available via plastic. Small businesses, about half of which rely on credit cards either to finance their operations or as a safety net, will feel the pinch.

Higher credit lines won’t come back after the recession, either, further squeezing access to capital and making it more difficult for many small firms to operate and expand.

Growing numbers of small business owners turned to credit cards as a primary financing tool after banks and other lenders put the brakes on lending amid rising loan defaults and a lack of liquidity. Plummeting asset values and slowing cash flows also make it tougher to get a loan these days.

Many banks view small business lending as particularly risky and less profitable than other types of loans. Companies that don’t have access to credit will be forced to lay off workers and cut other costs to make ends meet. “We are quite concerned that if things are not made to be a bit more equitable and fair for small businesses, we could see a longer, protracted recession,” says Molly Brogan, spokeswoman for the National Small Business Association.

While it’s mainly untapped credit that’s being reeled in, the cuts have an impact on entrepreneurs’ credit scores -- another whammy. Cutting a small business owner’s credit line could cause his or her personal FICO credit score to drop by 50 points or more if the owner is subsequently deemed to have too little available credit.

Of course, cutting credit lines hurts customers, too, dampening a rebound in consumer spending and further hurting retailers and suppliers.

But small businesses are not without options:

Fight back. To reduce the odds of having your credit lines cut, pay credit card and all other bills on time. Dust off any unused credit cards -- and use them. Keep close watch on credit reports pertaining to your finances.

Turn to nontraditional lenders. They typically have more flexible lending criteria. One such lender, venture capital backed On Deck Capital, bases its criteria on cash flow and company performance, placing less emphasis on personal credit scores.

Visit your community bank -- “one of the last sectors of the banking community that still make character loans,” Brogan says. However, community banks may not be as plentiful in some regions as megabanks with many branches.

Don’t forget about the Small Business Administration. Small businesses that have trouble securing a bank loan because of credit issues can apply for the SBA’s 7(a) loan program or a 504 loan, which is for the purchase of real estate or other fixed assets. The recent hike in the government’s guarantee to up to 90% of 7(a) loans, as well as the reduction or elimination of borrower and lender fees for both types, should make SBA loans more appealing. The catch? Compared with a credit card or traditional bank loan, applying for SBA help can take a long time and involves much more paperwork.

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