How big banks can regain Main Street cred

(Fortune) -- Let us for a moment stop beating up on America's much-maligned big banks. They have, for the most part, paid back the money they borrowed from taxpayers, with a big load of interest to boot. They've cut executive pay. And they're making strides in helping tens of thousands of homeowners stay in their houses rather than foreclosing.

But there's at least one area in which the banks could do better: lending to small businesses. The pullback in loans to small companies -- according to a recent Fed survey, 11% of senior loan officers say they've tightened lending standards to small business over the past two years -- means these firms can't get the money they need to expand their businesses, hire more workers, and help jump-start the economy, organically.

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Becky Quick

Ask any banker about this, and he will tell you that he is making loans, but only to businesses he thinks will pay him back. That's fair and even admirable. We don't want taxpayer-subsidized banks making bad loans. And we should note that overall demand for small-business loans is down since the recession hit. But the bankers' definition of who should qualify for a loan these days is so restrictive that many good businesses are getting left out in the cold.

Take B.R. Guest Restaurants, parent company of popular New York establishments such as Blue Water Grill, Blue Fin, Ruby Foo's, Dos Caminos, and others. Founder Stephen Hanson has opened 19 restaurants over the past two decades or so, and in a notoriously fickle and difficult industry has had overwhelming success. His business has more than $100 million in annual sales. Plus, he has a partner with deep pockets, private investment firm Starwood Capital, which owns a 50% stake in the company.

Now B.R. Guest wants to open a new, 1,000-seat eatery in Rockefeller Center. Because of the lousy business climate, it got a great deal on a lease. And the massive expansion would mean 300 new jobs for a city desperately in need. But when the company went for a loan, it came up dry. Starwood reached out to 32 banks. Only seven would even look at the proposal. And none of them, so far, has agreed to make the loan.

"It's amazing. It's really something. It's not a giant deal for us, but I'm shocked," says Starwood Capital's chairman and CEO, Barry Sternlicht. (Starwood Capital was a key investor in Starwood Hotels (HOT, Fortune 500), a separate company.)

It's not just that. The secondary tier of finance companies that used to cater to small business -- GE Capital (GE, Fortune 500), CIT (CIT), Finova, and GMAC -- aren't lending like they used to. But the banks, which get to borrow money from the government at a rate of 0%, aren't stepping in to fill the gap.

Business owners aren't the only ones who are concerned. Elizabeth Warren, head of the Congressional Oversight Panel for the government's Troubled Asset Relief Program, or TARP, is taking aim at this particular issue in her next report. While her findings aren't yet finalized, she worries that the problem will only get worse. "The only credit option today for most small businesses is a bank loan, but banks are hurting and have cut back on lending," Warren says. "To make matters worse, the hardest-hit banks tend to be smaller ones -- the same banks that disproportionately serve small business."

As for Starwood, Sternlicht says they'll find a way to get a loan and open the business, but it won't be the loan he wants. It will be a smaller loan with a bigger interest payment and shorter amortization time. If restaurateur Hanson didn't have a deep-pocketed partner? "I'm sure he'd be out of luck," Sternlicht says.

Sternlicht isn't a rabble-rousing protester who thinks the banks are inherently evil. He's a successful capitalist who has benefited massively from our system. If he's lost faith in the judgment of his fellow financiers, the big banks should take heed: Making more loans to small businesses is one area where a little goodwill could go a long way. And in the case of B.R. Guest, it could be a smart business decision too.

--Becky Quick is an anchor on CNBC's "Squawk Box."