The big companies get all of the media attention, but an economic recovery cannot occur unless small businesses are active participants. Small businesses have been hard hit by the economic downturn. And unlike huge corporations that have gotten assistance from the government, small businesses that need help are often left scrambling to find sources for financial support. That point was a central theme in a speech given this week by Federal Reserve Chairman Ben Bernanke.

“Small businesses are central to creating jobs in our economy; they employ roughly one-half of all Americans and account for about 60 percent of gross job creation. Newer small businesses, those less than two years old, are especially important: Over the past 20 years, these start-up enterprises accounted for roughly one-quarter of gross job creation even though they employed less than 10 percent of the workforce.

Bernanke acknowledged that “to support the recovery, we need to find ways to ensure that creditworthy borrowers have access to needed loans.”

“The formation and growth of small businesses depends critically on access to credit. Unfortunately, those businesses report that credit conditions remain very difficult. For example, the net percentage of survey respondents telling the National Federation of Independent Business that credit conditions have tightened over the prior three months has remained extremely elevated by historical standards. And one measure of banks’ loans to small businesses dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010.”

Bernanke noted that since February, the Federal Reserve has conducted more than 40 meetings across the country “to exchange ideas about the challenges facing small businesses, both in the near term and in the longer run.”

This raises a couple of questions:

•    Why has it taken so long for the government to realize the importance of small businesses?

•    What is the Federal Reserve going to do about the restricted flow of credit going to small businesses?

The fact that these meetings are being conducted is a pretty good indication that while there is finally recognition of a problem, the Federal Reserve doesn’t currently have a plan for dealing with it.

“Business owners cited credit lines and working capital as their most critical financial needs, followed by refinancing products that would permit them to take advantage of low interest rates. Many reported having had to resort to borrowing through their personal credit cards or from their retirement accounts.”

Anyone concerned about the U.S. economy should find that statement particularly onerous. It essentially means that some business owners are being forced to mortgage their futures to stay in business today.

Small business owners who need cash flow to maintain their operations have few options when they cannot get a line of credit or a loan from a bank. For many the first source of available cash with a low interest rate is an equity line of credit on their personal home. If that is exhausted or unavailable, credit cards and retirement accounts might be the only remaining options. But the difference in interest rates between these choices can jump from about 5% to as much as 30%.

Here is another comment from Bernanke: “Some of the lenders that participated in our meetings expressed the view that current lending conditions don’t represent credit tightening as much as a return to more traditional underwriting standards following a period of too-lax standards. But, though some lenders said they were emphasizing cash flow and relying less on collateral values in evaluating creditworthiness, it seems clear that some creditworthy businesses–including some whose collateral has lost value but whose cash flows remain strong–have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating.”

Advisors at Strategis Financial Group have seen firsthand examples of situations almost exactly like he is describing. The result is that small businesses have been forced to cut back on staff, reduce operations, or even shut down, even though they have operated successfully for years and were current on financial obligations.

“Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges.” It is good that Bernanke and the Federal Reserve are addressing and evaluating the critical role that small businesses play in our economy. Let us hope that this matter also comes to the attention of Congress and the Obama Administration and that steps are quickly taken to improve the situation for the nation’s small businesses.
F.S.