The Credit Crunch and Small Business

By John Tozzi

How directly will small business lending be affected by the ongoing financial crisis and forthcoming bailout? The evidence is mixed. Treasury Secretary Henry Paulson told Congress that the $700 billion plan was needed “in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy.” Business owners with bad credit, unproven ventures, or companies tied to troubled industries such as housing have had a particularly hard time borrowing, but many banks still want to lend to established firms with good credit and collateral.

There’s no question some companies are having credit cut off. In Ohio, banks are refusing to renew lines of credit and calling in loans made to decades-old family businesses that are current on payments, according to Dayton bankruptcy and workout attorney John Rieser. He says it’s the worst borrowing environment he has seen in 20 years. The pullback began early in 2008 and accelerated in the last four or five months. “They’re pulling the triggers and saying you’re done,” Rieser says. “It’s not just sick businesses. These are healthy businesses, and that’s the surprising thing.”  Read MORE