Banking crisis threatens small businesses

ATLANTA (Reuters) - A crisis in the U.S. bank sector has hit small businesses hard, drying up credit and throwing many long-standing banking relationships into doubt.

Several small business owners said in interviews they were forced to make severe cuts and to refrain from seeking credit as they try to ride out the worst U.S. recession in decades.

"It's difficult because banks are not lending money, so it's impossible to get any kind of short-term loan," said Hilary Halford, president of the Chamber of Commerce in Early County, in rural southwest Georgia.

"The whole way business is being conducted has changed."

The banking shake-up is at the core of the recession. Problems in the home mortgage lending industry sparked it.

Finding a solution to the issue of nonperforming bank assets is at the heart of attempts by U.S. President Barack Obama's government to revive the economy.

Opinion polls show how far banks as an institution have fallen in public opinion.

According to a January poll for NBC and the Wall Street Journal, 38 percent of respondents said they had some faith in financial institutions, down from 43 percent in September and 81 percent in 2000.

ON THE GROUND

Small business owners say the shake-up is changing their business culture in ways they could barely have imagined in better times.

Chuck Thomas said his bank had shut off a long-standing annual line of credit for his Birmingham, Alabama, business that includes construction and an aquatic nursery.

Instead, the bank allows him only monthly credit. To get it, he had to lay off most of his workers. After sales dropped, he revised his business plan and now makes little or no salary.

"It's better than the alternative," he said. The alternative is bankruptcy.

Bank consolidation also tends to reduce the quality of service to small firms, said Joseph Gardner, partner at an architectural firm in Atlanta.

Gardner said his firm severed a long-term relationship with one of the country's biggest banks two years ago because of poor service and now deals with a community bank.

"As you have a concentration of the banking sector in the hands of a few institutions, it is going to continue to create a faceless relationship with a large institution," Gardner said.

"You get further away from a handshake or a face that you recognize and that's an onerous trend."

For Bob Walk, who runs a print shop in Tucker, Georgia, his relationship with banks has changed while his business contracted in the downturn.

At its peak in 2001, the shop his father started in 1972 employed six people. Now Walk runs it alone and said he would not even consider asking for a loan.

"I am just kind of hanging in there right now. If I were to go to the bank for a loan I probably wouldn't get it," he said.

The shift in attitude of business owners toward banks does not mark a loss of trust but rather a response to a crisis that few could have foreseen, said Harvard University economics professor David Laibson.

"The bank never promised to provide credit in all circumstances. But the borrower assumed their previous relationship and access to credit would continue in good and bad times," Laibson said.

John Friedel, chief financial officer of Baldwin Paving, a company based in Marietta, Georgia, said his firm had little trouble obtaining credit but joked the recession had opened up a key distinction between different types of business.

"There are only two types of people. The ones that don't need credit and can get it and those that do need it and can't," he said.

(Additional reporting by Verna Gates in Alabama)

(Editing by Alan Elsner)