Small Businesses Squeezed As Banks Limit Lending
Carlo and Erin Bacci, owners of The Chocolate Truffle in Swampscott, Mass. - 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.
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RENEE MONTAGNE, host:
The troubles in the banks are trickling down to small businesses which are the key source of jobs. In fact, they've created the majority of new jobs over the last 15 years, according to the government. One would think small businesses would be crucial to an economic recovery. But at this moment, small business owners say banks and credit card companies are not giving them the credit they need, and that's keeping them from growing and hiring.
NPR's Chris Arnold reports.
CHRIS ARNOLD: Even in the midst of this severe recession, there are some businesses that are doing okay. Some see opportunities, and with the holidays coming up they want to hire more workers. But to do that, many need to borrow money. They need credit - and that's a lot harder to come by these days.
Mr. CARLO BACCI (Owner, The Chocolate Truffle): So, we're doing peanut butter cups today?
Unidentified Man: Yeah.
Mr. BACCI: Caramel I made yesterday.
Unidentified Man: Yeah.
Mr. BACCI: We got to make toffee.
ARNOLD: Carlo Bacci is checking in with his workers at his small chocolate factory in Swampscott, Massachusetts. There are big metal vats of chocolate here getting warmed and stirred by machines. Carlo and his wife Erin run the family business, The Chocolate Truffle. They have three retail stores, they sell to other stores and they make just about anything you can think of out of chocolate.
Now, what are these? These look like men's shoes. They're, like, size eight or something.
Mr. BACCI: Yeah, that'll get filled with chocolates and be given as a gift.
ARNOLD: And the whole shoe is made out of chocolate.
Mr. BACCI: Yes, yes.
ARNOLD: The business has been slowly growing, despite the downturn. And to keep growing the Baccis actually decided to sell their house to raise money to invest back into the business. They have three kids, and they really like their house.
Ms. ERIN BACCI (Owner, The Chocolate Truffle): You had a fabulous backyard. In the basement of the house, Carlo had built a stage for the girls so they can put on their little shows. It's a lot of crying in regard to selling the house. It was… I'm starting to cry now.
ARNOLD: By selling the house, the couple's been able to open up two more retail stores but they still need money to gear up for the holidays and buy more chocolate and supplies. They have always done that on their small business credit cards. But now that's much harder to do.
Carlo says take his American Express card - he's been paying it down so he'd have some credit available on it to borrow against the holidays.
Mr. BACCI: But lately, since the crisis, we've been cut off. And every time we pay down our card, our credit limit gets reduced.
ARNOLD: Some analysts think that this same problem that the Baccis are facing could really slow down the entire economic recovery. This business employs 14 people - they'd like to hire three or four more - but they say they can't because credit is too tight. So, if you magnify that across tens of thousands of businesses, that's a lot of jobs.
One of the problems is that overall, banks are just lending less money because many of them had lost so much money during this financial crisis.
Mr. DAVID KOTOK (Chief Economist, Cumberland Advisors): They haven't raised enough to get back to where they were. They're short.
ARNOLD: David Kotok is chief economist at Cumberland Advisors. He says the banks are capital-constrained. But he also says that credit is always tougher to get during times of economic turmoil. And at least in this recession, for small businesses that can get loans, borrowing is actually cheaper. Interest rates are low, and that's a big difference this time around.
He says, if you look back to the 1970s and '80s, interest rates were much, much higher.
Mr. KOTOK: The interest rates, they were absolutely killers in terms of the way they compressed business activity.
ARNOLD: Back then, the National Association of Independent Businesses did a survey. They asked businesses what was the number one problem that they were facing. About 40 percent cited financing and interest rates as number one. This time around, there are lots of other problems, and so far only five percent list credit as their top concern - but that might change.
Pete Kyle is a finance professor at the University of Maryland. He says many businesses, right now, are not trying to borrow money. They're still hunkered down.
Professor PETE KYLE (Finance, University of Maryland): But, if the economy turns around and starts growing, then businesses are going to want more credit. And that's when the test is going to come. And so as economic growth tries to pick up, you're going to start seeing more complaints from small business about access to credit.
ARNOLD: And Kyle says that could be a serious drag on the recovery. Kyle thinks that the government should force banks to raise more capital so they could loan out more money. David Kotok disagrees. He thinks at this point the market should just sort it out.
Meanwhile, the American Bankers Association says that business owners like the Baccis, with their chocolate factory, 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.
Chris Arnold, NPR News, Boston.
MONTAGNE: And this is MORNING EDITION from NPR News. Transcript provided by NPR, Copyright National Public Radio.
