Facing the Credit Crisis

Bank lending is down, credit-card interest rates are up and the country's largest small-business lender, CIT Group, is hanging by a thread. The top small-business credit card issuer, Advanta, shut its accounts down indefinitely.

Indeed, things are tough all over for small business, and home-based travel agents—many of which are one-person operations—are feeling the pinch. Agents who rely on credit to operate their day-to-day business are seeing limits tightened and finding themselves struggling to meet their financial obligations.

As President Obama approaches his 200th day in office, CNNMoney.com took a look back at his promises and programs intended to help small companies pull through the recession—and where they stand now.

The Rescue Plan

In October, then-candidate Obama issued a campaign paper calling on the Small Business Administration to take emergency measures to assist small businesses endangered by the financial crisis. The three-part plan called for the SBA to increase the loan guarantee it offers banks that make qualifying small business loans, to reduce the fees it charges lenders, and to lend more money directly to small businesses through its Disaster Loan Program.

Two of those three measures were included in the Recovery Act that Obama signed into law in February. The SBA's loan guarantees rose to 90 percent—if a business defaults, the government pays the bank back for the guaranteed portion of the loan. The agency also temporarily reduced or eliminated the fees it charges for its loan programs.

Those measures were intended to induce lenders to issue more SBA loans. According to Karen Mills, the SBA's administrator, the recipe worked. The SBA's weekly loan volume is up 45 percent since the stimulus bill passed, compared to the seven weeks immediately prior.

But the program wasn't a fix-all. The SBA is backing more loans than it was before the Recovery Act, but less than it did before last fall's financial meltdown. For the most recent quarter, ended June 30, SBA's main lending program issued 30 percent fewer loans than it did in 2008 and 55 percent fewer loans than it did in 2007.

Obama's third proposal, calling for direct lending from the SBA, was axed from the final version of the stimulus bill. But many small businesses have expressed their support for a program that would allow them to bypass the banks and receive loans directly from the government.

Secondary market recovery

The main reason banks that traditionally lend through the SBA's programs cut back so drastically as the recession took hold had little to do with the agency's fees and loan guarantee rates. Last fall, the banks faced a much more immediate problem: The secondary market froze.

Almost half of the SBA's lenders bundle and resell their loans to investors, then use the proceeds of those sales to make new loans. Mortgage lenders did something similar with housing loans. But when the housing market collapsed, investors caught on that many of the loans in those bundles of "asset-backed securities" were toxic —and the entire market stalled.

Legislators took several stabs at fixing the problem. The Treasury Department earmarked some of TARP's billions for a loan facility intended to reassure secondary-market investors, but the money came with strings attached. Participating institutions would have to limit executive pay and relinquish ownership shares to the government if they accepted the money.

Many said "no thanks" to that deal. The Treasury Department switched gears and began drafting a different program that would set aside up to $15 billion to buy SBA loan bundles directly from banks.

But while the government fumbled, a funny thing happened. The market healed itself.

"For any lender that wants to sell today, there's a market. The backlog has been cleaned out,"  Tony Wilkinson, president of the National Association of Government Guaranteed Lenders (NAGGL), told CNNmoney.com. "When the Fed set aside TARP funds to buy guaranteed portions, that was a good catalyst that got investors looking at the market again, but also, the credit markets have stabilized. The Prime and Libor rates are no longer out of whack."

But that doesn't mean that it's now easy for small business to find lenders. While some community banks and industry-focused lenders are taking new applications, large banks are still reluctant to play. The nation's largest small-business lender, CIT Group, is on the brink of bankruptcy and has already sharply reduced its lending.

"We should be doing more lending than we're doing, but there are a host of issues," says Wilkinson. "First, defaults rate are up both for SBA and conventional loans. Also, some lenders are still on sidelines despite the programs, and others are finding the SBA still too expensive for them to deliver."

The ARC loan program

When the direct lending provisions were cut from the final version of the stimulus bill, a sui generis program emerged from Congress instead. Called America's Recovery Capital, it offers struggling small business owners interest-free loans of up to $35,000 to temporarily cover payments on existing loans and business debt.

The long-anticipated program launched in mid-June, following a flurry of complaints from lenders that the loans wouldn't be profitable for them and posed significant risks. Although ARC loans are 100 percent guaranteed by the government, banks still need to devote time and resources to managing them, and they can get dinged by regulators if too many of their loans turn bad.

The program got off to a slow start. Unlike “Cash for Clunkers,” which blew through its entire funding allocation in less than a week, the ARC loan program initially looked like it wouldn't exhaust its $255 million funding before the planned end date of September 2010.

Seven weeks in, activity has picked up. The SBA is now averaging 133 loans each week, and is confident that it will reach its target of making around 10,000 ARC loans.

But small businesses that could use the help an ARC loan offers still face two major obstacles. First, the ARC program is only open to businesses that have been profitable in at least one of the last two years—a tall order for companies that have been suffering since the recession began in late 2007. Also, relatively few banks are making the loans.

Credit-card reform

As default rates climb, credit-card companies have offset those losses by hiking their rates and fees. One of the biggest culprits: Advanta, which issued cards primarily to small-business owners. Last year, it jacked interest rates across the board to nearly 30 percent. Many customers cancelled their cards, while others fell further behind on their payments. That combination proved fatal for the company, which announced plans in mid-May to shut down its card business.

Days later, Obama signed the Credit Card Accountability Responsibility and Disclosure Act, which aimed to curb credit-card companies' most egregious practices. But the legislation excludes corporate credit cards from the provisions.