The Sad State of Credit for Small Businesses | CreditShout

The Sad State of Credit for Small Businesses

By Kevin / December 9, 2009


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The following is a guest post by Buck Fleming. Buck has started a blog called Bucksays, where he covers mountain lions, life in the Rocky Mountains, and political issues.

747889164_d467f7d05eIn recent days the administration has decided to address the unemployment problem by using the remaining $200,000,000 of TARP money to help cure the problem. Remember that TARP was put together to supposedly save the United States financial system which was about to collapse. There were banks and brokerages which were “too large to fail”
TARP was funded overnight and apparently with more money than was needed.

The banks are now paying back the emergency funding which the Administration said would be used for debt reduction. They seem to have forgotten that promise to the public. The remaining major banks are bigger than ever and they are sitting on the money and not making credit available to small business. Historically small and newly formed businesses created a large majority of new jobs every year. If small business cannot get financed the job market suffers mightily.

Three years ago a local pizza shop opened with a sound business plan and a young entrepreneur who had the restaurant experience and college background that indicated a good possibility for success. Restaurants are risky start ups but the needed initial funding was found from friends and relatives. This may yet be an exciting success story but TARP, The Administration and banks that are too large to fail have held up the end of the story.

After two years of operation it became apparent that success was on the way for this small business. Unbelievably a small profit was made in year one and a bigger one in year two. Family and friends were paid back as required and planning started for a reasonable expansion to handle the growing volume of business.

As a first step in establishing a meaningful banking relationship the ownership went into the bank that handled the daily receipts and sought a small overdraft coverage of several thousand dollars. The request was summarily turned down since a pizza restaurant even though profitable did not meet the bank’s lending criteria. The ensuing discussion as to the possibility of a relatively small loan in the mid 5 figure range needed for bigger ovens and equipment improvements resulted in a similar clear answer. The pizza operation still did not meet the banks requirements to make a loan for expansion of operations, despite the increasing volume of receipts that was deposited every day in that bank. The perfect credit record with suppliers, rent, utilities and glowing write ups in food review articles meant nothing.

This proposed expansion will only mean a few new full time jobs and possibly 4 or 5 part time jobs for local college students. Not a big deal when 7 million Americans are unemployed, but this is the heart of the problem currently as to why those jobs are not being created. If this situation could be tracked across the country it would be seen to be repeated thousands of times every day by small businesses seeking start up or expansion funding.

This story will probably have a successful ending with no thanks to TARP, banks or government help. The shop has received commitments from friends and relatives to structure the needs for expansion to the next level. Many small businesses are not so fortunate to have a cadre of friends with the capability to help, as is this business.

The business is expanding, it has been profitable from it’s opening, the product has a growing loyal following and every bill has been paid on time for 3 years.

This like most small operations is a business that cannot get bank credit under current conditions. The Administration and the Federal Reserve don’t seem to understand that small business is the answer to 10% unemployment if support is directed to that sector.

It won’t be the nation’s answer but several people will get those new jobs making and delivering pizzas in a few months when the expansion is complete.

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