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Credit Crunch Has Small Business Crying ‘Help!’

New America Media, News Report, Annette Fuentes Posted: May 06, 2009

Editor’s Note: The economic downturn is claiming a mounting toll of casualties among California’s small businesses, a traditional employer of immigrants and ethnic minorities.

Namoch Sokhom has lots of stories about his small business-owner clients, and these days, none of them are good.

“We have a truck driver who used home equity to finance his business. Then gas prices went up. So every trip he ran, he lost money,” said Sokhom, director of the small business unit at PACE Business Development Center in Los Angeles. “So, he had to stop his trucking, and his home eventually went into foreclosure.”

Sokhom said PACE tried to help him renegotiate the loan with the bank, but couldn’t. “He lost his home and we have lost track of him since then,” Sokhom said.

Then there is the donut shop owner who made the mistake of being honest with his banker. “He said that sales were down, so he got his credit card limit reduced, even though he’s been making his payments on time,” he said. “And when credit is reduced—that reduces his credit score. It is not helpful these days.”

From Los Angeles to Sacramento, the economic downturn is claiming a mounting toll of casualties among California’s small business entrepreneurs. The chief culprit is the credit crunch, with traditional lenders—the banks—shutting down access to loans—even to existing business owners with healthy credit scores.

Increasingly, alternative lenders, usually nonprofit community agencies, are filling the void. They are making the loans to keep established businesses alive, and to aid the growing number of start-ups that are sprouting as the unemployed turn to self-employment as a way to survive. And for the smallest of small businesses, family and friends are often the bank of first resort.

“Unless you’re an existing business with great credit, you’re being told ‘no’ by traditional lenders,” said Roberto Barragan, executive director of the Valley Economic Development Corporation in Los Angeles. Banks have tightened loan underwriting criteria and are scrutinizing borrowers more closely, he explained. “They are being very picky,” Barragan said. “Now they want everything but your blood type to make a loan these days.”

Small businesses are a traditional employment option for immigrants and ethnic minorities, and in California that is especially the case. Together, Latinos, Asians and African Americans account for about 16 percent of all small business owners in California, compared to 8 percent nationwide. These entrepreneurs also tend to be low-income and have fewer resources to cushion their business in lean times.

Barragan’s agency, which was already the largest nonprofit small business lender in southern California, has quadrupled its loan-making from $250,000 a month to $1 million. Much of it is going to new clients who’d never had a problem getting bank loans.

“Businesses use credit every day. It’s their lifeblood. It allows them to meet payroll and build inventory,” Barragan said. “Without credit, it’s completely crippling.”

A wave of small business failures is contributing to Los Angeles’ 12 percent unemployment rate, and Barragan says the worst is yet to come—when the shopping malls fail and the commercial real estate sector crashes. “We haven’t seen the other shoe drop,” he said.

Sokhom is also watching the slow-motion crisis. He monitors bankruptcy listings published in the LA Business Journal, and until recently, Asians owned about 5 percent of those failed businesses. Now they account for about 50 percent. “For Asian groups, many use their homes to finance their business,” he said. “When business is going down, they are risking both their homes and business.”

California Capital, a nonprofit financial services agency in Sacramento, is helping to stabilize small business owners threatened with defaults. Their clients, like the banks, are becoming more risk-averse. “People are bootstrapping it more than anything else,” said Anthony Rucker, head of the loan guarantee program. “They are unsure of the future, so they are wary of taking on debt. There is movement to live within their means.”

Given the gloomy climate for existing small business, it might seem like the worst possible time to start up a new one. But community advocates say that there is surging interest in new start-ups, especially as the economy sheds jobs and more people turn to self-employment.

“Our financing resource center has never been so busy,” said Janet Lees, program director of the Renaissance Entrepreneur Center, a nonprofit that provides support to small businesses in San Francisco. “More people are wanting to start their own businesses, from fashion design to wellness, massage, retail stores, food, consultants, graphic design. You name it.” Lees says that the center has an extensive 14-week small business training program.

The Mission Economic Development Agency, also in San Francisco, is seeing the same increased demand in support for start-ups, says Andrew Murphy, director of the micro loan program. MEDA’s clients are primarily low-income Latinos who would not qualify for traditional bank loans, so the credit crunch is less a factor.

“More people are interested in self-employment, mostly things they have experience in from other jobs,” Murphy said, “like food-related business, janitorial services and home childcare. We are one of few organizations that deal with business planning and marketing for childcare businesses.”

A growing number of start-ups are turning to people they know to finance their ventures because banks are unlikely to give them loans. “We’re seeing this big trend of friend-and-family loans,” said Lees. “It is seen as a good investment. You’re not putting your money in the stock market. We are working with alternative lenders to structure smaller loans, of $5,000 to $50,000.”

Family loans are often the best way to fund a start-up, says Michael Elkin, a loan officer at the U.S. Small Business Administration office in San Francisco. Even though the SBA got stimulus money from Congress to pump up its loan programs, it still requires that banks agree to make those loans. And they consider start-ups too risky. Elkin says that the agency has made just half the number of loans it made last year, and some banks just dropped out of the SBA program altogether.

Alternative lenders and the Bank of Family and Friends can only do so much to help existing businesses survive the downturn and help launch new ones. Ultimately, says Janet Lees, the traditional banks must step up and start doing what they always have done: make loans.

“Confidence needs to flow again,” said Lees. “Banks are a business and they have to start doing business again. They have to loosen up and have some confidence again. They make money when they make loans. I’ve had a hard time getting my head around it. They are just ruled by fear.”

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