Even as the economy improves, financing may continue to be elusive for small businesses that drive job creation in the U.S.
Battered banks have cut back on loans and lines of credit. While smaller banks and credit unions have jumped in, they don't have the capacity to fully make up the financing needs.
It's unclear how small businesses, which account for half the U.S. economy, will find the funds to invest and propel the fragile recovery.
"We have to figure out how to get to the institutions and avenues small businesses actually use," said William Dennis, senior research fellow at the National Federation of Independent Business Research Foundation.
Despite government efforts to shore up the banking system, credit remains tight. The Federal Deposit Insurance Corp. last week said loans to small firms declined 1.9% in the past year. A Federal Reserve survey showed a third of banks tightened lending to businesses in the three months ended in July.
While the recession depresses demand for funds and hurts credit quality for small businesses, lines of credit are being cut for even solid firms, say advocates.
Meanwhile, community development financial institutions, such as credit unions and microloan funds, are making more loans, and larger ones, this year compared with last, according to a Philadelphia Federal Reserve Bank report on its region.
When it comes to number of loans made under the U.S. Small Business Administration's primary loan program, National Penn Bank and Susquehanna Bank have moved up in the Philadelphia area. They rank seventh and sixth respectively in the nine months ended July, from eighth and 12th during October 2006 through September 2007. In contrast, Bank of America Corp. (BAC) in the same period has gone from ranking fifth in number of loans - 118 - to 29th, with just four loans.
"Now, we're seeing more and more credit-worthy firms that are unable to get conventional financing," said Lynn Ozer, who manages Susquehanna's government guaranteed lending. She's seeing at least double the number of applicants for the SBA program than a year ago. Susquehanna Bancshares (SUSQ), based in Lititz, Pa., has $13.8 billion in assets.
Bank of America spokeswoman Tara Burke said the bank remains committed to small business. It lent more than $8 billion to companies with less than $20 million in annual revenue and modified payment structures for 32,000 small business credit-card customers so far this year, she said.
National Penn Bancshares Inc. (NPBC), based in Boyertown, Pa., with $9.7 billion in assets, didn't return a call for comment.
Groups that help small businesses are encouraging them to try regional banks. Philadelphia's Wharton Small Business Development Center is inviting more regional banks to attend its "meet the lenders" program in November and arranging its first-ever panel discussion with regional bank presidents in December.
But while regional banks didn't delve into the securitized products that bedeviled larger banks, they have exposure to commercial real estate - the next phase of the crisis. The National Association of Realtors recently said the market may only see meaningful recovery in the second half of 2010. Regional banks facing impending losses may cut back on credit even more.
Larger companies have the ability to bypass tight bank credit - they can sell bonds to investors, who lately have shown an insatiable appetite for the attractive assets. But small businesses have no such access. A long, protracted recovery may be the result.