Small businesses hit hard by credit squeeze

Small businesses used to create 60 to 80 percent of all new jobs. But now, thanks to the credit squeeze by banks who have been bailed out by the government, many small businesses are having to close or cut back. About 50 percent of the lending sources for small businesses are credit cards. Owners, who must buy goods to have inventory to sell to customers, often use credit.

Even small businesses that have a credit line at the bank for inventory purchases are seeing their credit lines slashed. As I indicated last week, these credit card cuts will stall the recovery, and based on a study by Meredith Whitney, we're only at the beginning of these cuts. She predicts that $2.7 trillion of credit card lines will be cut by the end of 2010.

The Obama administration is counting on the Term Asset-Backed Securities Loan Facility (TALF) to ease up credit availability. The administration will start releasing TALF funds on March 25. "If it succeeds, the TALF can be an important step in both preserving what's left of consumer and small business lending and restoring those markets," Alan Binder told Bloomberg. Binder is an economics professor at Princeton University and former vice chairman of the Federal Reserve.

While lenders continue to try to find ways to minimize risk as default levels continue to rise, the squeeze on small businesses will only get worse. Credit card companies charge-offs were 7.1 percent on average in January, compared to 4.6 percent a year earlier. To minimize the damage, banks are cutting credit lines even more. Here's a list from Bloomberg of expected cuts:

  • Citigroup (C) expects to cut credit lines by $600 billion
  • Bank of America (BAC) expects to cut credit lines by $500 billion
  • American Express (AXP) expects to cut credit lines by $100 billion
  • JP Morgan Chase (JPM) expects to cut credit lines by $300 billion

Reports indicate that Wells Fargo (WFC) is also slashing some business credit lines in half. HSBC (HBC) is pulling out of the credit card market in the U.S., and Capital One (COF) has been slashing credit lines and jacking up interest rates for a while.

Soon, small businesses will have nowhere to turn to for credit. The Obama Administration hopes to loosen up credit for small businesses by raising federal loan guarantees on Small Business Administration lending. But will TALF and SBA lending be enough? Bloomberg quotes numerous small business owners who have had to cut their inventory or close up shop. Either way, by weakening small businesses, there is no way for this economy to recovery.

Lita Epstein has written more than 25 books, including the Complete Idiot's Guide to Improving Your Credit Score.

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