Small-business loans slow to a trickle

Tom Abate, Chronicle Staff Writer

Wednesday, May 27, 2009

Lending to small businesses had slowed even before last fall's financial meltdown, and the credit picture has probably worsened since then, according to a report from the Small Business Administration's Office of Advocacy.

The report issued Tuesday said the growth of small-business loans - those less than $1 million - had fallen to 4 percent as of June 2008, or half the rate that prevailed during 2007.

The SBA defines a small business as any firm with 500 or fewer employees. Collectively, the small-business sector accounts for about half of total U.S. employment and has created roughly 70 percent of all new jobs in recent years.

Charles Ou, co-author of the SBA report, said it's too soon to get data on lending activity since last fall. But he said anecdotal evidence suggests credit to small businesses has slowed even further, giving this economic engine less fuel to grow.

"Since last winter, it has been horrible," Ou said. "You have real, real problems out there."

The SBA report identifies banks that focus on small loans. At Oakland's Innovative Bank, one of California's top-ranked lenders, Vice President Danny Alfonso said he has cut way back on small business loans.

Alfonso said Innovative has been one of the top issuers of SBA-backed small office/home office loans with a $50,000 limit. Through June 2008, Innovative had been funding about 350 such loans per month. Now it is issuing about 70 such loans monthly, mainly because of tougher eligibility requirements, he said.

"Loans that had been paying for two to three years have started to default," he said. "We have really tightened up our credit underwriting."

At Mission National Bank in San Francisco, another top small-business lender, President Dave Joves said he is getting more demand from prospective borrowers but has kept lending steady to err on the side of caution.

"Until the economy turns, you really want to be particular about who you lend to," he said.

The National Federation of Independent Business, a lobbying group, has polled small businesses on credit issues and found that some can't get access to loans or have had their credit limits reduced by banks or credit card issuers.

But economist Bruce Phillips, with the NFIB Research Foundation, said access to credit is not the primary challenge facing small firms.

He said many business owners are reluctant to borrow because they aren't sure they can increase sales to justify the extra expense.

"They have lost faith in the economy and haven't spent much money on capital equipment because they're worried about revenues," he said.

E-mail Tom Abate at tabate@sfchronicle.com