The Credit Crunch and Small Business

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John Millman, president of Sterling National Bank (STL), sees the current crisis for banking giants as an opportunity for regional banks like his, based in New York. Sterling specializes in small business lending, and the company's shares hit a 52-week high on Sept. 19. "We don't do the exotic stuff that you read about at the giant money center banks," he says. "When there's disruption in the marketplace, that creates opportunity for banks like ours who have lots of liquidity."

Sterling is running ads in The Wall Street Journal (NWS) asking, "What credit crunch?" in an attempt to gain market share from other banks pulling back on small business lending. But Millman agrees that some sort of bailout is justified because the failure of larger banks would reduce credit available to small companies. "The community banks in aggregate don't have the resources to carry the economy by themselves," he says.

Already Frozen

And while Paulson and Fed Chairman Ben Bernanke warned that failing to pass the bailout would freeze credit, in truth many lenders began pulling back more than a year ago at early signs of the housing meltdown. Wells Fargo tightened credit to businesses in certain areas and industries as early as March 2007, says Marc Bernstein, executive vice-president and manager of the program for commercial loans under $100,000. "Most of the people who we think we are going to reduce their lines, we've already done it," he says. The bank became especially wary of lending to housing-related firms in areas where home prices have been hit hardest, including Florida, Arizona, and parts of California.

Still, Bernstein says Wells Fargo is committed to extending credit to those small business borrowers it thinks will be able to pay it back. "As we understand better what businesses and regions are not very affected by this, we're trying to make sure that they're not penalized by some blanket conservatism," he says. "We are going to follow the economy at the local level for different industries, and wherever we see strengthening, or for that matter just lack of deterioration, we will do our best to make credit available to those people."

With banks like Wells Fargo already pulling back and others tightening standards further after the upheavals this month, even the $700 billion bailout isn't likely to unlock credit for affected small firms immediately, says Sophia Koropeckyj, managing director of industry economics at Moody's Economy.com (MCO). "This bailout is going to have a modest effect. It's difficult to say how long it will take to unwind the sort of seizing up of the financial system," she says. "There has to be this general, somewhat more amorphous improvement in just business confidence in the economy."

Tozzi covers small business for BusinessWeek.com.