Surviving the Credit Crunch

In another measure, 22 big banks that are required to report small business loans to the Treasury Department said the monthly total has fallen by $8 billion since April. A recent National Small Business Association survey of small business owners found 60 percent have used a credit card in the past year to provide business capital, while only 45 percent had borrowed from a bank for the same reason.

Meredith Whitley, president of a credit advisory company, wrote in The Wall Street Journal that other sources of small business credit are also on the wane. For instance, the home equity loan well has mostly gone dry, since nearly a third of homes are worth less than their existing mortgages. This analyst painted an even darker picture of overall small business lending, citing Federal Reserve data showing small business lending off $113 billion from its peak at the end of 2008.

Business owners turning to their last resort -- credit cards -- have not met with much of a reception. Whitley says credit card issuers trying to shore up shaky portfolios have cut their credit card lines by over $1.25 trillion in the last two years while canceling 10 percent of credit cards.

The good news, if you can call it that, is that a few large banks are waking up to the possibility that there are some good credit risks among small businesses. Several have launched marketing efforts to get business owners to sign up for business credit cards, even while they reduce conventional lending to small business.

A look at mega-bank JPMorgan Chase reveals the new trend in capsule. Chase recently introduced a new line of small business credit cards that it's marketing actively. At the same time, the bank's participation in the main Small Business Administration loan guarantee program during the federal fiscal year ended in September is off 80 percent. In 2008, Chase made 6,100 loans through SBA, compared to just 1,250 in 2009.

One problem with this shift, from the small business perspective, is that SBA loans usually have very low interest rates. Meanwhile, Chase's new Ink set of business credits cards has rates as high as 30 percent. Another issue: reliability. Once a small business owner has received an SBA loan, the money is handed out on schedule as long as the borrower conforms to the terms of the loan. With a credit card, a bank can lower the credit limit, raise the interest rate or simply cancel the account for no reason and with little warning.