While oversized and overextended financial firms get all the attention, small business owners are quietly struggling to get by.

On a professional sports team, one experienced player can command all of the attention-and all of the payroll. Consider David Beckham of the Los Angeles Galaxy: he makes millions every year, while some of his teammates are earning less than $20,000. The bailout of institutional mortgage investors is having the same overshadowing impact on small business owners, even though both play important roles in the U.S. economic engine.

Squeaky wheel gets grease

Lawmakers have approved a plan to pump some three quarters of a trillion dollars into the credit markets and release financial institutions from the burden of their worthless mortgage-related securities. But the jury is still out on how this historic bailout will affect small business owners, who are helping to bail out these large firms through their tax dollars.

To date, data doesn't show definitively that the mortgage crisis has directly impacted small business lending. There are signs that lenders have tightened up their small business underwriting standards, which makes it harder to obtain a loan. However, in the face of a slowing economy, small businesses aren't as eager to borrow money, anyway. Some experts suggest that any cutback from lenders may be offset by reduced demand from these prudent entrepreneurs.

A larger problem may be just around the corner, however. If the economy continues to struggle, small businesses will face declining profits and, eventually, deteriorating financial strength. Such businesses won't be looking for loans to fund expansion, but they might need credit just to keep their doors open. In the current lending environment, where conservatism has finally taken precedence, those businesses may not qualify for bank loans. Instead, they'll rely on more expensive forms of debt, such as credit cards.

Government guarantee not what it used to be

One area of business lending that has been ratcheted back is the government-guaranteed Small Business Administration (SBA) loan. Year to date, loans made through the SBA's 7(a) and 504 programs are down in excess of 10 percent. The 7(a) program offers traditional business loans of up to $2 million, while the 504 program finances real estate and fixed assets up to $1.5 million. Both loan types are guaranteed by the feds, which is supposed to encourage competitive terms from lenders.

Unfortunately, lenders aren't taking that federal guarantee as seriously as they used to. Many are raising the qualification standards, and some are dropping the SBA programs completely, because the SBA loans are too expensive. The National Small Business Association (NSBA) says it can't reduce the fees unless Congress subsidizes the program. Certainly, it wouldn't take $700 billion to protect this important small business funding source.

In team sports, the superstar salary often leaves the team unable to afford any role players. Hopefully, the mortgage bailout won't have the same impact; the team doesn't get any stronger if you save Wall Street at the expense of the small business owner.

Published on October 22, 2008