Debate rages over reality of small business credit crunch.

Debate rages over reality of small business credit crunch 

A credit crunch for many small- and medium- sized businesses may be gripping the nation, but banking and small business experts disagree on whether the effects are being felt in the Southland.

The May 1990 Senior Loan Officer Opinion Survey on Bank Lending Practices, recently released by the Federal Reserve System, found that a majority of 60 banks surveyed had tightened credit standards for small- and medium- sized businesses.

"The survey offers disturbing conclusions regarding tighter lending requirements," said U.S. Rep. Esteban Torres, a Pico Rivera Democrat, and a member of the House Small Business and Banking committees. "I realize that small business loans aren't as profitable [as loans to larger businesses], but I believe that if small businesses meet all credit criteria they should be treated appropriately."

Torres said that a primary victim of such tightening are minority-owned firms and that his Pico Rivera office has received frequent complaints regarding credit availability from such businesses.

Of all the banks surveyed a total of 58.6 percent said that they had tightened their credit standards for approving loan applications for consumer and industrial loans since late 1989 for middle-market firms and 54.4 percent of all banks surveyed said they had tightened credit standards for small businesses.

In the survey, "small businesses" were defined as firms with annual sales of $50 million to $250 million, though a number of banks used their own definitions.

Less favorable economic conditions and pressures on banks capital positions from new banking capital standards were cited most often by banks with tightened credit as the reason for the tightening, followed by deterioration in the quality of their loan portfolio, industry specific problems and regulatory pressures.

Last week, members of the Small Business Committee and banking regulators were scheduled to meet to discuss the problem. A similar meeting was conducted in April, "but at the time, the regulators said they couldn't document the credit crunch," said a committee spokesman.

The Federal Reserve study did not break down the data by state, however, and many observers have concluded that tightening credit is a regional problem.

"Small business is experiencing a regional tightening of credit lines due to regional conditions," said John Galles, executive vice president of Washington-based National Small Business United, a small business advocacy group. "The southwest and northeast sections of the country are being hit harder."

Some local lenders are increasing their service to middle market firms. "That [a tightening of credit to small businesses] couldn't be further from the truth as far as we are concerned," said Frank Abraham, senior vice president for credit administration for Security Pacific's Middle Market Group, which was formed in July to serve companies with yearly revenues from $2 million to $100 million.

"The middle market sector is the most dynamic market of the wholesale market," he said.

The California Association of Bankers said, however, that tight regulations may indeed be leading to tightening credit. "Bank examiners are being very strict to the point of overreacting, especially regarding real estate lending," said Nancy Evans, director of cummunications and public affairs for the California Association of Bankers. "We are very concerned that this may be leading to a credit crunch."

A credit crunch may be leading to more business for asset-based lenders. Santa Monica-based Fremont Financial Corp. reported an increase in prospective transactions of 50 percent since the beginning of the year.

"We're seeing higher quality transactions which would usually have gone to regonal banks or to the large money centers six months ago," said Robert Tenney, Fremont president and chief executive officer.

He added that the company's experience in Los Angeles has differed little from operations in other cities across the country. He added that larger banks have become more conservative more quickly than smaller banks.

The Federal Reserve study, however, found that small- and medium-sized banks were curtailing credit more rapidly than the largest banks. A total of 70 percent of small banks tightened credit to middle market firms and 60 percent tightened requirements to small businesses, compared to 46.4 percent of large banks regarding middle market firms and 48.1 percent of large banks regarding small businesses.

A number of factors may have combined to produce a more conservative stance by banks. Banking regulators, prodded by the events of the savings and loan disaster and by defaults involving real estate, overseas and agricultural loans, are examining bank transactions with heightened vigilence and the economy is slowing , leading to fears about whether borrowers can pay back their loans.

One banking executive said that what has changed recently are not standards for credit, but interest of business people in taking out loans. "Today there is more a lack of demand than a credit crunch. There is more wariness on the borrower's part," said Richard Jett, President of Empire Bank in Ontario and past president of Southern California Independent Bankers.

The officer poll found that 50.9 percent of banks surveyed said that growth of consumer and industrial loans had decreased from 1988. Only 21 percent of the respondents said that it had increased.

Tenney said that loan options for many small businesses have been further reduced by the decisions of commercial financial companies to move upscale regarding minimum lending requirements.

Credit for small businesses has been getting tighter since July, said the president of a financial company which is a private lender under the U.S. Small Business Administration.

"The banks are getting more conservative," said Arthur Sweet, president of Certified Business Funding of North Hollywood. He said that the Los Angeles Small Business Administration office, which guarantees loans to small businesses, has tightened its standards for loan approvals.

Executives at both the Los Angeles and local regional offices of the Small Business Administration denied that there has been any tightening of credit and said that they have also failed to observe any general tightening of credit by local banks.

The National Federation of Independent Businesses recently conducted its own survey to determine if there was a credit crunch, and the answer was "no." "We think it's [alleged recent credit tightening] a rumor," said Terry Hill, a spokesman for the federation. "We think it was set off by a series of articles. People with good track records have no problems."

Mimi Schwied, president of the Los Angeles chapter of the National Association of Women Business Owners said that she has not observed a significant increase in the number of complaints by members regarding insufficient credit.

Hill said, however, that there is the possibility of real crunch should the Federal Reserve tighten the nation's money supply.