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For several years, small businesses have become increasingly reliant on credit cards as a major source of financing for purchases large and small and sometimes even to keep their doors open. This trend, exacerbated by the current economic crisis felt around the world, has had a trickle down effect from banks to business, as borrowers become less creditworthy and banks tighten their lending criteria to protect their already stressed balance sheets.
According to the National Small Business Association, 59% of small business financing in 2009 has come from credit cards, 45% from bank loans, 19% from private loans made by family or friends, and 5% from the Small Business Administration.
At a Senate Committee on Small Business and Entrepreneurship hearing convened Thursday to explore the impact of the American Recovery and Reinvestment Act on small business and alternative sources of financing for entrepreneurs, Susan Sobbott, president of American Express OPEN, said that in 2009 her company has authorized more than $2 billion in charges per week to small and minority-owned businesses.
“We’re doing everything we can to continue to keep our credit available to facilitate the spending of small business. In particular we’ve done a lot to help women business owners and have a women’s business initiative where we have many advocates and through that we are touching many minority owned businesses,” said Sobbott. “We work consistently with a micro loan for women owned businesses and also have government contracting work that we do to try to assist women-owned businesses, again many of them minorities.”
American Express found in a survey of small business owners that 38% said they’re having trouble making their payments on time and that’s one of their key worries. “The reason is their customers aren’t paying them on time so that’s creating this gap in cash flow,” said Sobbot.
SBA administrator Karen Mills had some positive news to share during her hearing testimony.
The SBA received $730 million in recovery funds, $375 million of which was provided to increase, if only temporarily, loan guarantees and to reduce or eliminate fees on certain 7(a) and 504 loans. Mills testified that since the recovery act’s passage, the average weekly loan volume is up 28% in the 7(a) program and 22% n the 504 program. A recent Urban Institute study found that 22% of those loans have gone to minority-owned businesses.
“This increased lending is partially due to the fact that lenders are returning to these loan programs, or in some cases, participating for the first time. More than 1200 lenders have approved 7(a) loans as part of the recovery act,” said Mills. She added that 360 of those lenders had not made a loan since October 2008 and almost half had not made a loan since 2007.
Marianne Garvin, president and CEO of the Community Development Corporation of Long Island, testified that the SBA’s increased loan guarantee was the deciding factor in a loan her organization recently made that under different circumstances would have been denied. Still, she added, its delinquency rate has increased from an average of 2% in 2007 to a current rate of 25% and market conditions have resulted in a deteriorating portfolio. The organization was forced to put a three-month moratorium on lending to work with its troubled borrowers.