Small Consolation

CFO Magazine (Stuart) - Despite the lip service paid to the importance of small businesses, efforts to ease their credit woes have come up short.

In February, Congress put several measures in the American Recovery and Reinvestment Act that should have helped Doherty [and other SMMs], including increasing some SBA guarantees to 90% of principal (up from an 85% maximum) and waiving loan fees for 2009. The stimulus act also created the SBA's new America's Recovery Capital (ARC) loan program, which floats small businesses up to $35,000 in expenses over six months, interest-free. "I will do whatever it takes to help the small business that can't pay its workers," President Obama said in a speech to Congress shortly after signing the bill.

Unfortunately for Doherty, banks haven't taken a similar pledge. He has investigated the new ARC loan — specifically designed to help struggling companies make debt and interest payments — with two local banks but has concluded that "it's a myth." Among the many reasons he believes banks were reluctant: the risk and administrative hassles associated with the small amount made it a nonstarter for them.

The number of small-business bankruptcies is up 50% for the first three quarters of the year, says credit-reporting firm Equifax, with 9,361 closing their doors in September alone. According to a recent survey of 150 business owners commissioned by consulting firm Angrisani Turnarounds, 65% are concerned or very concerned that their business will fail within the next two years.

In the interim, many small-business owners are tapping resources outside the banking sector, namely, private investors. The landscape there is only slightly less bleak. Angel investors, usually the first source of outside equity for small businesses, shelled out 27% fewer dollars in the first half of 2009 compared with the same period in 2008, according to the Center for Venture Research at the University of New Hampshire. The one bright spot? The number of deals increased 6%.

Some argue that the contraction in small-business credit is actually due to a lack of demand. Most entrepreneurs self-finance as much as possible, say experts, and seek a loan only as a last resort or for an extraordinary growth project. Now that new hiring and many capital expenditures are on hold, debt is the last thing small businesses want.