03/25/2009 05:12 am ET Updated May 25, 2011

Business Credit Crunch: Where it Really Hurts

Last week we asked business owners about business credit: bank loans, commercial credit, SBA loans, etc. Results were not good, as the numbers (below) show. But perhaps more importantly, we examined what the small business credit crunch really means - not as numbers or statistics, but as hard times for real people.

For example, this comes from an owner who employs seven people, and who was rejected recently after applying for additional credit:

"After 13 years in business and a perfect payment record, suddenly they want personal guarantees and since mine was the first paycheck to go in hard times my credit now sucks. Prior relationships mean nothing.  WHERE IS THE SBA?...out of money."

As I browse the stories from respondents to the survey, I'm looking almost exclusively at the ones square in the sites of the crunch -- meaning the businesses that applied for financing, but didn't get it. I'm not sharing the pure-pain stories of businesses that didn't apply, not even the ones that said they would have applied except for the crisis. This isn't really about the businesses going down that can't get help. Not that there isn't tremendous pain in that category, but on the other hand, banks making bad loans to poor credit risks is part of what got us into this mess. Banking law requires banks to be careful.

But what about this one? A high-end hair salon started two years ago grew 62 percent last year, and put half a million dollars into renovating the location. It has nine employees:

"We have huge potential, yet bankers want you in business for three years, and discount the 500K we have put in."

I'm not an attorney and I don't claim to know banking law, but I do own a business and mine got bank credit, years ago, before it was three years old. I don't think that 3-year requirement is by law. Do you? So?

The 64-year-old owner of a 27-year-old business, with five employees, says the bank refused to acknowledge his $3 million recording studio as an asset. As a result:

I will be soon going out of business even though we have more to offer than ever before.  We are now in a vicious death spiral when $100,000 to $200,000 would or would have allow us to be wildly successful.

The numbers seem pretty bad. Only 6% of the owners had loan applications approved. Another 7% have loans pending. Only 36% of them applied for loans, but 64% of those who applied were rejected. And those are the toughest stories to take, particularly when they're like the ones above -- seemingly sound businesses, with jobs at stake, in peril for lack of normal credit.

Percentages mean little without a basis of comparison. The obvious follow-up question is: what's normal? Maybe it's always been that bad. The best thing I could find was a National Federation of Small Businesses (NFIB) survey taken last Fall (so the crunch had already started). In that one, 30% had applied for a loan, compared to our 36%. However, only a third of that survey's loan applicants were rejected, and for our group, last week 64% were rejected.

However, we can't say our survey presents an accurate picture of all of the country, or all of small businesses. So maybe the difference between our survey and the NFIB one is a matter of who was asked to take it. They say they have a random sample. This one was posted here, and on a few small business blogs, and in Twitter. So it's not statistically random.

What we can say, though, is that this survey is a picture of several hundred people who own small businesses. And sure, they can exaggerate -- there's no lie detector involved -- but the 74 owners whose loan applications were rejected had 1,024 employees between them. And they're hurting. And the 98 owners who would have applied but didn't had 598 employees.

It does seem that the bigger small businesses had more access to credit. The 6% that got their loans approved had an average of 28 employees each, while the 23% that applied and were turned down averaged only 14 employees each.  The full group averaged 10 employees per business, but more than half of them had fewer than five. Owners who didn't apply but would have, if not for the crunch, had an average of 6 employees.

If you're interested, you're welcome to download the raw data. You can click here for the Excel version, and click here for the tab-delimited txt version. Of course I cleaned out all personal information, and all of the comments, to protect our respondents' privacy.

And I can't help going back to those rejected loan applications. That's the sorest point in the survey. After all, we can't blame the banks for the ones who didn't apply.

My post title comes from this comment, from an owner who has five employees and had his application rejected:

"According to the bank the money just isn't there.  A year or more ago the loan would have been approved. We would like to add a couple of employees and there is every reason to believe we could grow beyond that. We just need the equipment for them to work on. Amazingly the work is there. The money just isn't."

This one had 40 employees, but was rejected.

My company is out of business after 71 years because the bank was not willing to extend our financing because we lost money after a large expansion and business declined. We were going in a positive direction by making cuts and reducing overhead. We never missed a loan payment and paid increasing interest rates and penalties. In the end the bank made it so impossible for our company to do business.

I could go on, but I'll close this post with this comment from a woman whose company has 25 employees, but couldn't get a loan for less than $50,000:

We have been in business for 30 years. We took out a $90,000 SBA loan a few years ago and it is paid down to $17,000. We now can't get a loan.

I am heartsick.  My husband and I have been married for 44 years and have been homeowners for 43 years. It looks like we will have to face bankruptcy and foreclosure even though we have been offered a contract that needs 15,000 yards of concrete. It means we need to have a larger concrete plant but can not obtain funding for the plant.  We would need to hire several more employees.   

I feel we have been set up for failure. We have always had excellent credit during the years.  Why can't our government help us?  If we don't get help we can't provide jobs, and cannot provide medical insurance for ourselves or our employees. Many have children.  My husband had a heart attack and a 5 bypass. Will there be welfare, food stamps and medical care available for everyone?

Sounds to me like that's another 25 jobs lost to a company that ought to have been able to secure a business loan, add to its plant, and employ more people. And I think that's what small business credit crunch really means. It's not numbers in the abstract, and it's not banks making bad loans: it's banks not making good loans.

Many small businesses depend on community banks for their credit. For more on how these community banks are faring, click here.