Obama's progress: Small business still struggling
President Obama has accomplished some of his promises to small business owners, but the credit crunch still has too many companies trapped in a death spiral.
NEW YORK (CNNMoney.com) -- While Washington talks up the importance of small businesses and their vital role in economic recovery, small business owners remain caught in a credit maelstrom.
Bank lending is down, credit card interest rates are up, and the country's largest small business lender, CIT Group (CIT, Fortune 500), is hanging by a thread. The top small business credit card issuer, Advanta, shut its accounts down indefinitely.
As President Obama approaches his 200th day in office, here's a look back at his promises and programs intended to help small companies pull through the recession.
In October, then-candidate Obama issued a campaign paper calling on the Small Business Administration to take emergency measures to assist small businesses endangered by the financial crisis. The three-part plan called for the SBA to increase the loan guarantee it offers banks that make qualifying small business loans, to reduce the fees it charges lenders, and to lend more money directly to small businesses through its Disaster Loan Program.
Two of those three measures were included in the Recovery Act that Obama signed into law in February. The SBA's loan guarantees rose to 90% -- if a business defaults, the government pays the bank back for the guaranteed portion of the loan. The agency also temporarily reduced or eliminated the fees it charges for its loan programs.
Those measures were intended to induce lenders to issue more SBA loans. According to Karen Mills, the SBA's administrator, the recipe worked. The SBA's weekly loan volume is up 45% since the stimulus bill passed, compared to the seven weeks immediately prior.
But the program wasn't a fix-all. The SBA is backing more loans than it was before the Recovery Act, but less than it did before last fall's financial meltdown. For the most recent quarter, ended June 30, SBA's main lending program issued 30% fewer loans than it did in 2008 and 55% fewer loans than it did in 2007.
Obama's third proposal, calling for direct lending from the SBA, was axed from the final version of the stimulus bill. But many small businesses have expressed their support for a program that would allow them to bypass the banks and receive loans directly from the government.
"In the '70s, we could go to the SBA and get a loan with money that was funded [directly], rather than the guarantees from banks," says Clarence McGill of Cincinnati, who owns Integrated Solutions and Services, a facilities management firm, with his son. His 43-person company is doing well but can't grow without a line of credit. McGill has had to skip making bids on lucrative contracts because he can't find a bank willing to offer the financing his firm would need to fulfill the contract.
"Direct lending would definitely be beneficial because there would be no bank risk criteria," he says. "Just like the government deals with GM and Chrysler, the government can say, 'We see a possibility that you may fail, but we'll take chance.' Banks don't say that."
The main reason banks that traditionally lend through the SBA's programs cut back so drastically as the recession took hold had little to do with the agency's fees and loan guarantee rates. Last fall, the banks faced a much more immediate problem: The secondary market froze.
Almost half of the SBA's lenders bundle and resell their loans to investors, then use the proceeds of those sales to make new loans. Mortgage lenders did something similar with housing loans. But when the housing market collapsed, investors caught on that many of the loans in those bundles of "asset-backed securities" were toxic -- and the entire market stalled.
Legislators took several stabs at fixing the problem. The Treasury Department earmarked some of TARP's billions for a loan facility intended to reassure secondary-market investors, but the money came with strings attached. Participating institutions would have to limit executive pay and relinquish ownership shares to the government if they accepted the money.
Many said "no thanks" to that deal. The Treasury Department switched gears and began drafting a different program that would set aside up to $15 billion to buy SBA loan bundles directly from banks.
But while the government fumbled, a funny thing happened. The market healed itself.
"For any lender that wants to sell today, there's a market. The backlog has been cleaned out," says Tony Wilkinson, president of the National Association of Government Guaranteed Lenders (NAGGL). "When the Fed set aside TARP funds to buy guaranteed portions, that was a good catalyst that got investors looking at the market again, but also, the credit markets have stabilized. The Prime and Libor rates are no longer out of whack."
But that doesn't mean that it's now easy for small business to find lenders. While some community banks and industry-focused lenders are taking new applications, large banks are still reluctant to play. The nation's largest small business lender, CIT Group, is on the brink of bankruptcy and has already sharply reduced its lending.
"We should be doing more lending than we're doing, but there are a host of issues," says Wilkinson. "First, defaults rate are up both for SBA and conventional loans. Also, some lenders are still on sidelines despite the programs, and others are finding the SBA still too expensive for them to deliver."
When the direct lending provisions were cut from the final version of the stimulus bill, a sui generis program emerged from Congress instead. Called America's Recovery Capital, it offers struggling small business owners interest-free loans of up to $35,000 to temporarily cover payments on existing loans and business debt.
The long-anticipated program launched in mid-June, following a flurry of complaints from lenders that the loans wouldn't be profitable for them and posed significant risks. Although ARC loans are 100% guaranteed by the government, banks still need to devote time and resources to managing them, and they can get dinged by regulators if too many of their loans turn bad.
The program got off to a slow start. Unlike Cash for Clunkers, which blew through its entire funding allocation in less than a week, the ARC loan program initially looked like it wouldn't exhaust its $255 million funding before the planned end date of September 2010.
Seven weeks in, activity has picked up. The SBA is now averaging 133 loans each week, and Mills is confident that her agency will reach its target of making around 10,000 ARC loans.
But small businesses that could use the help an ARC loan offers still face two major obstacles. First, the ARC program is only open to businesses that have been profitable in at least one of the last two years -- a tall order for companies that have been suffering since the recession began in late 2007.
Also, relatively few banks are making the loans.
Tracy Tremelling, a banker-turned-entrepreneur who runs Free Range Funding in Idaho Falls, Idaho, set up his business two years ago to help businesses manage their financials and find loans. When he approached his bank for an ARC loan, he was told that it didn't matter that he qualified -- the loans were not profitable enough for the bank to bother offering them. The second bank he approached told him it was only making ARC loans to the bank's current customers.
"It's been discouraging, and it makes me wonder, 'Am I doing business with the right bank? Should I instead be more diversified with my deposits and then have multiple banks that aren't 100% happy with me?'" he says. "I'm disappointed in the amount of money that has been spent on the stimulus that's been road-blocked at the banks. The SBA has great-intentioned programs, but once they hit the banks, the programs hit the skids. That's been my biggest frustration."
As default rates climb, credit card companies have offset those losses by hiking their rates and fees. One of biggest culprits: Advanta, which issued cards primarily to small business owners. Last year, it jacked interest rates across the board to nearly 30%. Many customers cancelled their cards, while others fell further behind on their payments. That combination proved fatal for the company, which announced plans in mid-May to shut down its card business.
Days later, Obama signed the Credit Card Accountability Responsibility and Disclosure Act, which aimed to curb credit card companies' most egregious practices. But the legislation excludes corporate credit cards from the provisions.
"It's like we have a target on our backs," says David Hazzard, owner of Copy Cat Printers, a family-run printing company in Spokane, Wash. "We're wide open to people taking advantage of us and increasing rates. We apply, and within three months the interest rate goes from 9% to 22%."
Hazzard says his credit score is excellent and that he has never had a problem finding credit lines. Hazzard lost his Advanta card when the company shut down its lending in June, and he intentionally closed two other cards when their terms became unreasonable. Now, he has one card that he uses only in instances where he can't use cash.
Regarding the legislation, Hazzard says "it's just typical" of Washington to leave out the small business owner.
"We're fortunate that we have savings and we can manage," he says. "I'm not going to go away just yet." 
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