Victoria Braden says she never had problems getting a bank line of credit in 14 years of business. But last fall, Braden, who owns a group health insurance consulting firm in the Atlanta area, was denied a loan by her new bank. "They said my financials didn't support it," she recalls, even though her Braden Benefit Strategies firm, staffed by 10 employees, was about as profitable last year as the year before. But there was a hiccup. One of her clients, a landscaping company, had to cut its staff after drought and the housing downturn slowed business. Braden's income declined because she is paid on a per-employee basis.
And while Braden says she was able to compensate for this setback by adding new clients, that negative blip raised enough of a red flag with the bank to put the kibosh on the loan. Now perhaps this situation was merely an isolated incident and not a sign that Wall Street's credit crunch is extending to Main Street. But it is a worrisome one as 2008 begins. When the economy slows, bankers usually tighten standards for lending to small businesses, the little engines of America's jobs machine. And there is little doubt the economy is slowing and maybe heading for a recession.
A January 8 survey of small-business owners by the National Federation of Independent Business found that 7 percent of owners reported problems obtaining financing, up 3 points from November. They're not feeling too good about the future, either: Fewer owners expected credit conditions to ease in the coming month. "Some owners," writes study author William Dunkelberg, "now see credit tightening on Main Street in spite of the Fed's expansionary policies."
But a credit tightening does not necessarily mean a credit crunch. Relatively few small-business loans have been packaged and sold to investors, and the harder-hit big banks aren't too involved in lending to small business. Fred Mishkin, Federal Reserve Board governor, said recently that it was "unlikely" that small business would face a serious credit squeeze.
Is Mishkin's optimism misplaced in 2008 with recession signals flashing? James Ballentine, director of economic development at the American Bankers Association, doesn't think so: "We have not seen any substantial losses in small-business lending." Nor, Ballentine notes, have requests increased for Small Business Administration loans—a common move by business owners when credit is tight.
Kevin Reynolds, regional president for Cardinal Bank who works with small-business clients in the Washington, D.C., area, adds that Fed rate cuts should help small businesses by reducing their borrowing costs.
Not that small business is out of the woods. Any spillover from corporate credit markets might take time to be felt, and a downturn could make entrepreneurs scrap start-up plans. That might be reason enough for small-business people to feel gloomy.