Credit crunch hits small businesses (US)

(CNNMoney.com) -- Stephani Smith's Maui-based healthy meals delivery company had been thriving since 2004, but needed financial assistance to expand its marketing efforts and Web exposure.
"I was the type of business that in times like this people have to cut out," she explains. "More and more people had to let go of the convenience we offered to save money and instead make their own dinners, pack their own kid's lunches, do their own grocery shopping and eat less organically."
Smith approached Leili McKinley of Haiku, Hawaii, business consultancy Soaring Phoenix in February 2007 to get advice on procuring a bank loan that she believed would help her boost business in a tough economy. With a good credit score and a business partner who had connections with a corporate officer at American Savings Bank, Smith would be a shoo-in for a loan, McKinley thought. So Smith reached out to ASB and Central Pacific Bank (CPF) for help.
"But the banks stalled on her," McKinley said. "Every time we called, it was something different - lost paperwork or required documents that had never been asked for. It seemed that their tactic was to see for how long she could survive without the loan before considering her."
She couldn't. After months of holding on, Smith folded her business.
Around 65% of domestic banks say they have tightened their lending standards for commercial and industrial loans to small firms over the past three months, according to the July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, released in August from the Federal Reserve System. That's up sharply from the 50% of banks reporting tighter credit in the April edition of the quarterly survey.
The National Federation of Independent Businesses' most recent Small Business Economic Trends report sings a different tune, saying that that the credit crunch is a Wall Street-only issue. Thirty-four percent of the survey's August respondents, a selection of NFIB members, reported regular borrowing activity. That's in line with historical trends, although 10% said loans are getting harder to land. Only 2% of the owners polled cited the cost and availability of credit as their number-one business problem, far from the record 37% in 1982.
Bill Dunkelberg, chief economist for the NFIB criticized the Bank Lending Practices report's findings, noting that the 52 banks surveyed represent the largest banks in the nation. As chairman of Liberty Bell Bank, a small bank in southern New Jersey, Dunkelberg believes that smaller banks, which cater more to small businesses than to large ones, are doing just fine.
"As a small bank, we're not borrowing deposits to lend out or any of that fancy schmancy stuff," he said. "We have the savings accounts of the little people and we're lending out to them."
But Maria Coyne, executive vice president of community banking for KeyBank (KEY, Fortune 500), a nationwide midsized lending institution, sees banks everywhere clamping down. Even smaller banks that avoided the risky gambles that have decimated Wall Street are hit by the ripple effects of major crashes like Bear Sterns and Lehman Brothers (LEH, Fortune 500).
"Most banks are safe and sound, but these unprecedented times are affecting everything that has to do with banking," she said. "Stock prices have depressed, capital costs have increased, and regulators are more focused on capital adequacy ratios -- even for banks that didn't do sub prime mortgage lending." Banks still want new clients, but Coyne sees them being ultra-cautious