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Wagons East: Credit Help May Be Coming around the Bend

Angus Loten Recessionwire

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July 30, 2009

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The nation's entrepreneurs, an usually optimistic bunch by nature, are showing signs of recession fatigue. But take heed. Help, like the perennial stagecoach, is coming round the bend.

Market downturns can destroy companies, but they also create opportunities. Just as CIT, the nation's largest small-business lender, is slipping into bankruptcy -- drying up a major credit source for business owners at a time when they need it most -- Wells Fargo is moving into the small-business market at full gallop.

And not a moment too soon. While other broad economic indicators are looking up -- more housing starts, an upturn in new factory orders -- a mid-year report released by the National Small Business Association released is far less rosy. It shows small-business owners starving for cash as they grapple with tougher loan conditions, reduced lines of credit and frozen credit cards.

Of more than 300 small-business owners surveyed, 80 percent said they've struggled with access to credit in the past few months, up from 67 percent a year ago. More reported harsher terms on credit cards and lower lines of credit. At the same time, sales, revenue and profits continued to slide, making availability of outside capital all the more crucial, the survey found.

All this as CIT, which owes billions more than it's taking in or lending out, is being denied a second federal bailout. Its collapse would imperil millions of small and midsize businesses -- from your local barber shop to Dunkin Donuts -- that have billions of dollars in CIT credit lines.

NSBA President Todd O. McCracken called the survey results a “wakeup call to lawmakers that small business may not be able to tread water much longer.

While federal officials downplay the broader economic impact of allowing CIT to fail -- the company has $7.2 billion in debt coming due in early 2010 -- its liquidity woes are already rippling through the economy. Despite a growing demand among small businesses, the New York-based lender has been quietly scaling back its lines of credit from $6.1 billion at the end of last year to $5.3 billion by March. By June, the company's second-quarter lending to small business fell by a staggering 88 percent from the previous year. That gap has taken billions of dollars out of the system at the worst time possible.

Even its closest competitors say a CIT bankruptcy would flood the markets with credit demand they simply can't absorb.

But at least one big lender is jumping on that as a source of expansion, from West to East. Just as CIT's small-business lending plummeted over the second quarter, Wells Fargo's rose by 27 percent from a year ago to $586.9 million -- making it the quarter's biggest small-business lender for the first time the bank's history. In January, the San Francisco-based bank acquired Wachovia, the nation's fourth biggest small-business lender in a costly deal last year, according to the Coleman Report, a weekly newsletter that tracks small-business lending.

The good news for small-business owners? Wells Fargo, the West Coast's biggest bank, is in far better shape than CIT. This week, the bank reported earnings of $3.17 billion, or 57 cents a share, over the second quarter. That's up 81 percent from the same period last and ahead of analysts; expectations, marking the bank's second straight quarter of growth.

Those are the kinds of numbers cash-strapped entrepreneurs can be optimistic about.

Image credit: Creative Commons