As our economy continues to weaken and credit markets freeze up, stories abound in the media about bank’s holding back on their small business loans. But let me tell you what it is like in the trenches: Most banks are not lending at all. In fact, they are closing the door even to existing loans and lines of credit. Pretty bad, right? I am not going to sugarcoat it. Frankly, you have heard too much of that lately in Washington. This article will give you some suggestions as to where your search should begin in finding a small business loan.

So forget about buying a ticket to Washington and asking for your own private bailout. Let us start with an actual example. ABC Company has been in business for five years selling fire protection and extinguisher products to apartment units and office buildings. Although the profits have ebbed last year a bit, it has seen increased gross income each year and in fact had to hirer five additional employees. Because of material costs, a $150,000 home equity line was taken out for business purposes. The owner, Mr. X, has a credit score of 760. Unlike many Americans, there is very little personal debt and his credit cards are well below the 25% available limits. Because of profitability, the credit line was down to a mere $15,000. Suddenly, without any advance notice, he was informed the credit line has now been cut to $50,000.00. Having relied on this credit line, two large contracts were recently signed which required the purchase of a substantial amount of inventory. Now it is problematical whether he will be able to complete one of the contracts. Does this sound pretty close to home?

Mr. X then called his banker and politely asked for an explanation. He didn’t get much, except there was some talk of reducing his “loan to value” percentage from 90% to 50%. But there was no indication his home has decreased in value or his credit has slipped. He offered to furnish an updated financial statement, but this was rejected. Perplexed, he walked away without any real answers. It was like trying to get a real answer from a politician.

I am a business loan provider and small business advocate with 25,000 funded loans under my belt. I have the scars to prove it. And I don’t work for any bank. So let me give you the skinny: Big banks are not loaning to businesses, period. What bankers discuss in the back room they don’t tell you. Many of them are taking the position that if housing prices go up 100%, maybe in ten years, they might consider loaning to the next generation. Gee, thanks. In the meantime, they are all too happy to receive as much bailout money as possible to simply increase their balance sheets and give them the leverage to buy smaller banks. Traditionally a bank made its decision based upon asset value, cash flow, updated financial information (business and personal–which they can require pursuant to their loan agreements and personal guarantees), or credit underwriting standards. Now it is simply done arbitrarily out of fear. The answer is: there is no legitimate answer.

Enter the Federal government’s TARP 700 billion bailout. On September 26, 2008 former President Bush indicated: “It will help take pressure off the balance sheets of banks and other financial institutions. That will allow them to resume lending and get our financial systems moving again.” Right. Many industry spokespersons were skeptical and now we know for sure that it has done nothing as far as filtering down to small businesses. Filtering is really the wrong word here since it has been absorbed anonymously somewhere into the vagaries of their balance sheets.

So who do you go to? Use Small community banks in your area or small SBA lenders who specialize in helping small businesses. The emphasis is on “small” institutions. The answer comes from simple economics 101. While the large banks are jumping on their corporate jets and getting out of that business for the indefinite future, the smaller ones are picking up the slack and seizing the market. And many of the smaller banks had more conservative underwriting practices. I was speaking with a senior vice-president of a small community bank in the south the other day and expected the answer of not making loans. He looked at me strangely and said no, they were still making loans. They were not affected by the sub-prime meltdown, namely not having a large number of toxic mortgages on the books. In fact, he was looking for more business.

Does that mean that all small community banks are opening the floodgates to small business loans?. Of course not. But my suggestion is to contact at least five of them in your area in person and get to know the credit managers. C’mon now, remain positive. You’ll be surprised at the results. In the next article I will discuss the pointers of how to successfully present yourself to a banker.