TOPICS > Economy

Small Businesses Buckling Under Recession’s Credit Freeze

December 14, 2009 at 12:00 AM EDT
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Tom Bearden examines how small businesses' inability to get credit is playing out in Colorado.

JIM LEHRER: And, as we just heard, the major concerns raised at today’s meeting were the problems of small business, particularly when it comes to loans and credit.

Well, NewsHour correspondent Tom Bearden reports now on how that has played out for small businesses in Colorado.

TOM BEARDEN: This tiny house is the world headquarters of the Vedante Corporation in Boulder, Colorado. Barbara Kantor’s business card says CEO and founder. She’s also the marketing manager, chief accountant, and inventory manager, in short, a one-woman corporation.

It wasn’t always that way. A former California fashion designer and independent businesswoman, she moved to Colorado two years ago to do something new: manufacture and sell reflective armbands and dog leashes to help motorists spot pedestrians at night. At first, it went well. The products are popular on and in retail outlets. But then the recession hit, and her sources of capital began to dry up.

BARBARA KANTOR, founder & CEO, Vedante: I started looking at bank funding. And, boy, it’s nightmare out there, to be honest, at the moment. The banks just aren’t loaning to small businesses. And I have an extremely high credit rating.

TOM BEARDEN: Unable to get a loan, she cut costs, gave up her office space, began to take deliveries at home, and to use her own car to haul products to an unheated storage unit 45 minutes away, where she stacks and tracks it all, even in the depths of a Colorado winter.

Small business owners like Kantor seem to be the hardest-hit, as banks hold on to capital in the wake of the banking crisis last year.

DON CHILDEARS, president, Colorado Bankers Association: Do you have any messages for me?

TOM BEARDEN: Don Childears is the head of the Colorado Bankers Association.

DON CHILDEARS: Lenders themselves have their own financial restrictions. We have suffered bigger loan losses than we’re typically used to. That naturally depletes the capital of the bank, which means it basically can lend less in a community.

Now, we happening to have record capital levels because we’re so conservative with the stashing capital into the bank as fast as we can.

TOM BEARDEN: While banks say they need to hold on to more capital to prevent a future collapse, President Barack Obama is asking them to loosen up. That’s why he invited bank executives to the White House today to discuss how they can better help small businesses looking for loans.

LEE PROSENJAK, co-owner, Cherry Creek Dance: So, it will be $350.

TOM BEARDEN: Lee Prosenjak could have used that help not long ago. He’s co-owner of the Cherry Creek Dance studio near downtown Denver. Each week, some 1,800 students, ages 4 to 64, come here for lessons in ballet, jazz, hip-hop, and tap.

WOMAN: Heel forward. Knee is straight.

TOM BEARDEN: The studio has been profitable for 16 years. Last summer, Prosenjak went shopping for a $1 million loan to expand to larger studio space. He says his business is so good that the Small Business Administration, a federal agency that guarantees small business loans from private banks, gave him a letter to show lenders that the SBA would guarantee 40 percent of the value of the loan. The banks were not impressed.

LEE PROSENJAK: The national banks shut it down immediately. There was nothing — you know, nothing — not a chance there. The local banks at least sort of seemed to run it up the flagpole a bit. And to have them just sort of turn it down flatly, without even really taking a look at the package, was sort of a slap in the face.

TOM BEARDEN: Prosenjak got his new studio, but only because the real estate market was so bad that the building’s owner agreed to carry the loan himself. Kantor and Prosenjak are just two examples of what Ken Coors calls the worst small business crisis in American history.

Coors is a retired longtime small business man who volunteers with SCORE, the Service Corps of Retired Executives. The organization provides business advice to people like Kantor.

KEN COORS: The banks are — are not making loans, of course, and they are reducing credit lines. They’re making — they’re making life miserable for — for good, solid companies that are in tough times. We’re saving the banks, we’re saving the car companies, we’re saving the insurance companies.

These little people under the radar, they’re not political. They don’t — can’t hire lobbyists. They’re just — they’re trying to do the best they can, and — and we’re not helping them. We can, but we’re not.

TOM BEARDEN: The $787 billion stimulus bill includes a number of programs designed to help small businesses through the recession. Among them is the $255 million America’s Recovery Capital Loan program, or ARC. It offers up to $35,000 government-guaranteed loans to viable small businesses suffering immediate financial hardships.

Karen Mills is the SBA administrator.

KAREN MILLS: So far, we have done about 4,500 of them. They are in every state in the country, and they are right now about almost 1,000 banks making these loans.

DON CHILDEARS: But the government flatly designed the program with the best of intentions and a program that flatly doesn’t work.

TOM BEARDEN: The Bankers Association’s Childears says his members don’t want to take part because the ARC qualification process is Byzantine.

DON CHILDEARS: I don’t know if anybody within the SBA, state government, any lenders that would defend that kind of bureaucratic nightmare that they put together, 32 pages of detail, whereas, if I think a bank designed that, it would be a couple of pages of easy-to-understand things. There are not very many small businesses who actually qualify for ARC loans.

TOM BEARDEN: Barbara Kantor couldn’t find a bank that would even talk to her about an ARC loan.

COLIN SHATTUCK, co-owner, Sportique Scooters: I think if you rode a GTS for a week, if you just borrowed one, you would probably have to have one.

TOM BEARDEN: Colin Shattuck’s banker wouldn’t even take an application. Shattuck has been selling motor scooters at four stores in Colorado for more than 10 years. In 2008, Sportique Scooters had a record year. What a difference a year makes. When gas prices dropped, sales cratered.

COLIN SHATTUCK: In 2008, we actually had a local news outlet here to do a report on the Scooter shortage in the United States. And now we’re — we’re literally choking on inventory. It’s beyond hard to stay open. It’s virtually impossible. And we have had to reduce our staff levels much more dramatically than I ever have before.

We’re — we have grown over the last 10 years typically 20 to 25 percent per year. This is the first decline we have seen, and it’s in excess of 60 percent.

TOM BEARDEN: So, Shattuck turned to his longtime banker and asked about the ARC loan program.

COLIN SHATTUCK: My local banker, who’s a friend of mine and an upstanding, nice guy, will look me right in the eye and tell me there’s no credit. We have talked with numerous local banks. We have basically been told, you don’t have the assets to borrow against. And so we have looked into the ARC loan process through the SBA, which we’re stilling working with Wells Fargo at this time, but early indications are we’re going to be declined.

TOM BEARDEN: All three of these small business owners approached Wells Fargo, and other banks, and all were turned down. Wells Fargo declined our request for an interview, saying they are the leader in small business lending.

Childears says, don’t blame the banks; blame conflicting signals from the government.

DON CHILDEARS: You have got the White House and the Congress and the media saying, go faster. Lend more money. They have got their foot on the accelerator. They want the money loaned to businesses to kind of get us out of this recession.

But we don’t answer to any of those parties. Banks are regulated by a variety of bank regulatory agencies, and they have absolute control over a bank. And they are very conservative. And they say, no, you don’t. We don’t want you making those kinds of loans.

TOM BEARDEN: But Administrator Mills insists the ARC loan program, as well as other SBA loan programs, are a success.

KAREN MILLS: We Have Gotten $16 billion in SBA-guaranteed loans out into the hands of small business so far. So, now, what do we do? Because there is still needs for credit out there. So, we have got programs that the president has asked Congress to continue our Recovery Act money. We’re going to raise our limits.

TOM BEARDEN: In the meantime, Barbara Kantor got some bad news last week. J.P. Morgan Chase Bank slashed her line of credit by 90 percent.

BARBARA KANTOR: Somebody who’s hardworking, who’s ethical, who plays by the rules, always pays on time, the banks used to support, and now…

TOM BEARDEN: A lot of small business owners say they need help right now if they are to avoid closing their doors for good.