Small Businesses Squeezed As Banks Limit Lending With U.S. unemployment near 10 percent, small businesses — which the government says created 64 percent of new jobs in the past 15 years — will need to play a major role in the recovery. But, as they try to gear up for the holidays, some owners — like The Chocolate Truffle's Carlo Bacci — say banks and credit card companies are stunting their growth.
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Small Businesses Squeezed As Banks Limit Lending

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Small Businesses Squeezed As Banks Limit Lending

Small Businesses Squeezed As Banks Limit Lending

Small Businesses Squeezed As Banks Limit Lending

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  • <iframe src="https://www.npr.org/player/embed/113816657/113816605" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Carlo and Erin Bacci, owners of The Chocolate Truffle in Swampscott, Mass., were able to open two more retail stores after selling their home. But they're having trouble finding lenders to help them gear up for the holidays. Chris Arnold/NPR hide caption

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Chris Arnold/NPR

Carlo and Erin Bacci, owners of The Chocolate Truffle in Swampscott, Mass., were able to open two more retail stores after selling their home. But they're having trouble finding lenders to help them gear up for the holidays.

Chris Arnold/NPR

With U.S. unemployment near 10 percent, small businesses — which the government says created 64 percent of new jobs in the past 15 years — will need to play a major role in the recovery. But, as they try to gear up for the holidays, some owners say banks and credit card companies are squeezing them and stunting their growth.

Carlo Bacci and his wife, Erin, run the family business — The Chocolate Truffle in Swampscott, Mass. They have three retail stores, they sell to other stores, and they make just about anything you can think of out of chocolate — even a men's shoe.

"That'll get filled with chocolates and be given as a gift," Carlo Bacci says.

The business has been slowly growing despite the downturn, and the Baccis decided to sell their house to raise money to invest so it could keep growing.

Selling the house allowed the couple to open two more retail stores, but they need more money to gear up for the holidays — to buy more chocolate and supplies. They've always done that on their small business credit cards, but now that's much harder to do.

'We've Been Cut Off'

Bacci says he's been paying down one card so he'd have room to borrow again for the holidays.

"But lately, since the crisis, we've been cut off," he says. "And every time we pay down our card, our credit limit gets reduced."

The Baccis' business employs 14 people. They'd like to hire three or four more, but they say they can't because credit is so tight. If you magnify that across tens of thousands of businesses, that's a lot of jobs. And some analysts think that could slow the entire economic recovery.

The problem is that because many banks lost so much money during the financial crisis, they're lending less money overall.

"They haven't raised enough to get back to where they were. They're short," says David Kotok, chief economist at Cumberland Advisors.

Low Interest Rates

The banks are capital-constrained, he says, but credit is always tougher to get during times of economic turmoil. And at least in this recession, for the small businesses that can get loans, borrowing is cheaper. Interest rates are low, and that's a big difference this time around.

If you look back to the 1970s and '80s, Kotok says, rates were much higher.

"The interest rates — they were absolutely killers in terms of the way they compressed business activity," he says.

Back then, the National Association of Independent Businesses surveyed businesses about the No. 1 problem they were facing. About 40 percent cited financing and interest rates as No. 1. This time, there are a lot of other problems, and so far only 5 percent list credit as their top concern. But that might change.

A Key Test To Come

Pete Kyle, a finance professor at the University of Maryland, says many businesses right now aren't trying to borrow money. They're still hunkered down.

"But if the economy turns around and starts growing, then businesses are going to want more credit," Kyle says. "And that's when the test is going to come. As economic growth tries to pick up, you're going to see more complaints from small business about access to credit."

Kyle says that could be a serious drag on the recovery, and the government should force banks to raise more capital. Kotok disagrees, saying that at this point the market should sort it out.

Meanwhile, the American Bankers Association says business owners like the Baccis should shop around. Some banks might not be very eager to loan money, but others took much smaller losses in recent years and are much more willing to lend right now.