With a narrow trickle of credit and a steep decline in venture funding, small businesses are having a tougher time obtaining capital. But there may be some light at the end of the tunnel.

Lending restrictions have made borrowing money and accessing capital more difficult for small businesses. Combined with a decrease in nationwide capital spending and venture funding, the prospect of expanding an existing business or starting a new one seems unpromising at the moment. But despite the challenging financial climate, new initiatives and growing public concern may help lighten the burden on small-business owners.

In an April survey of senior loan officers conducted by the Federal Reserve, approximately 40 percent of domestic respondents reported tightening their credit standards for small firms in the last three months, making it the 10th consecutive quarter that small businesses have faced stiffening constraints for obtaining loans.

In addition, more than 30 percent of banks have tightened the maximum credit lines and collateralization requirements among commercial and industrial loans for companies making less than $50 million in annual sales.

Small manufacturers have been hit particularly hard by the credit restrictions. In an open letter to media, the Association for Manufacturing Technology (AMT) recently reported that about three-quarters of small manufacturers surveyed have felt credit reductions in the last six months, forcing half to change the way they do business and nearly 60 percent to engage in or consider self-financing.

According to AMT, the results “paint a bleak picture of desperation — and showed why measures aimed at restarting small business lending are so urgently needed.”

The narrowing trickle of credit is also expected to contribute to the decline in capital spending. The PNC Financial Services Group, Inc.’s PNC Economic Outlook survey of small and middle-market businesses, released last month, indicates that 79 percent of small to mid-level business owners plan to reduce capital spending over the next six months, compared to 66 percent from the previous autumn. Most of these businesses are not expected to show significant growth in the next year.

Part of the drop may be attributed to difficult conditions in the industrial sector. Analysis from Zacks Investment Research indicates that year-over-year manufacturing output has dropped by 13.1 percent, forecasting a further slowdown in capital spending across a wide range of industries.

Lending difficulties are unlikely to be alleviated by supplementary funding, as venture capital investments in the first quarter of 2009 have reached a 12-year low, according to a joint report from PriceWaterhouseCoopers and the National Venture Capital Association (NVCA).

Approximately $3 billion in venture capital has been spent in 549 deals in Q1 2009, a decrease of 47 percent in dollars and 37 percent in deals over the previous quarter, while the value of first-time deals for new companies declined by 48 percent. These are the lowest estimates for venture capital spending since 1997.

But despite the grim credit and capital outlook, there are some optimistic signs for the future.

“One quarter does not a trend make. We know from reports from the field that a number of deals were started in Q1, but it’s taking longer to get them done and they are closing in the second quarter,” John Taylor, vice president of the NVCA, told media during a conference call (via CIO.com).

In March, President Barack Obama announced a three-pronged package to unclog the flow of credit to small businesses. The new program for unlocking credit for small businesses includes hundreds of millions of dollars from the $787 billion American Reinvestment and Recovery Act to reduce lending fees while increasing government guarantees up to 90 percent on a portion of Small Business Administration (SBA) loans. The law also reduces fees for borrowers and seeks to increase bank liquidity by injecting $15 billion of Troubled Asset Relief Program (TARP) funds into banks to thaw the credit market and boost small business lending.

The SBA is adjusting requirements to make up to 70,000 more firms eligible for government-backed small business loans, Reuters reports. This temporary change in the 7(a) loan program is set to last until Sept. 30, 2010, but some results are already noticeable. For instance, the value of SBA-supported loans sold into the secondary market rose to $135.3 million in February, an increase of roughly 60 percent since January and a sign that small business credit is being gradually unfrozen, BusinessWeek reports.

Although still in the early stages, these trends indicate it may be possible to reverse current credit problems and eventually have a stronger small business community emerge from the crisis.

Resources

The April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices
Federal Reserve Board, May 4, 2009

Letter to the Editor
by Ronald Shildge
The Association for Manufacturing Technology, March 19, 2009

PNC Economic Outlook
PNC Financial Services Group, April 2009

Machinery and Industrials
by Mario Ricchio
Zacks Investment Research, April 15, 2009

MoneyTree Report
PriceWaterhouseCoopers and the National Venture Capital Association, April 18, 2009

Study: US Venture Capital Spending Plummeted in Q1
by Chris Kanaracus
IDG News Service (via CIO.com), April 17, 2009

Small Business Size Standards
U.S. Small Business Administration

U.S. Makes More Businesses Eligible for Loans
by David Lawder
Reuters, May 5, 2009

A Promising Sign for Small Business Loans
by Kimberly Weisul
BusinessWeek, April 17, 2009