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Small Business

BofA's Small Business Lending Woes

CEO Kenneth Lewis calls the portfolio "a damn disaster," which means the credit squeeze may get worse

Bank of America (BAC) has taken a hit on small business lending—and that could mean still tighter credit for entrepreneurs. In a conference call with analysts on Oct. 6, BofA Chairman and CEO Kenneth Lewis called the deteriorating credit quality of the small business portfolio "a damn disaster."

The numbers tell the story. In the recent third quarter, BofA took $527 million in charge-offs from bad small business loans, up from $239 million in the third quarter of 2007. And while the small business loan portfolio at the end of the third quarter stood at $19.4 billion, up from $16.4 billion a year ago, it was down from $19.9 billion at the end of the second quarter.

Nancy Bush, an independent banking analyst, says much of BofA's small business headache stems from unsecured loans the bank made in recent years. And while Bush says BofA was pinning the problems on questionable underwriting standards in the past, the bank says the weakening economy is now contributing to the problem.

There's no doubt that BofA has retreated a good deal on its involvement in the Small Business Administration's 7(a) program. According to the SBA, BofA made 3,270 7(a) loans totaling $101 million in the 11 months ending Aug. 31. That's only about a third of 2007's volume, when BofA made 10,878 loans valued at $336 million in the full year.

Startling Pullback

The decline in lending means that BofA is now the fourth-largest SBA lender. It was No. 1 in 2007. And while other lenders have curbed their SBA lending activity, none of the big players cut back nearly as much as BofA.

For those working with small businesses around the country, the pullback is startling. "Bank of America has done virtually nothing in New Jersey [in terms of 7(a) loans] in the last three or four months," says Jim Kosci, district director of the SBA office in New Jersey. "And they used to do huge numbers for us."

BofA spokesperson Tara Murphy Burke says: "SBA loans are a small percentage of our overall small business lending portfolio. SBA numbers change from year to year, and recent market conditions and product changes have impacted our numbers." She says that BofA has relationships with more than 4 million small business owners and continues to make loans to "creditworthy customers."

Still, experts such as Nancy Bush warn that small business owners will now encounter much more stringent credit standards at BofA. In particular, she says, it will be extremely difficult to get an unsecured loan. While it might not have seemed easy to get credit a year ago, small business owners may look back on that period as the good old days.

Barrett is a senior correspondent for BusinessWeek SmallBiz.

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