The economy will not recover until banks start lending to small businesses, said Federal Reserve Chairman Ben Bernanke.

Bernanke urged banks to loosen lending to smaller companies at a Fed conference Monday, saying that small businesses employ about half of all Americans and account for 60 percent of job creation.

Startups are especially vital, Bernanke said. Over the past 20 years, startup businesses accounted for about a quarter of all job creation.

Meanwhile, big companies are building up their cash reserves and are expected to report strong earnings in the coming week, said the Associated Press.

According to the National Federation of Independent Businesses, roughly one-third of small businesses seeking credit have had trouble getting it. Banks counter that the demand for credit remains weak.

Several big banks, including Bank of America, JPMorgan Chase and Citigroup, have pledged to increase small business lending this year. Total lending to small businesses has continued to decline, however, dropping from around $710 billion in the second quarter 2008 to less than $670 billion in the first quarter of this year, said the AP.

A number of small business owners say they are relying on personal credit cards or dipping into their own savings to stay afloat.

The conviction that the ‘trade creditor’ would come to the rescue and fund businesses may no longer be the case. Trade creditors are now scrutinizing their credit applicants. While banks just make up about 20% of the short term credit for small businesses, the other suppliers make up the rest (surveyed by Credit Research Foundation, a trade group in Columbia, MD). But with banks showing more friction towards lending, small companies have their eyes fixed on private creditors for loans. They are also pressing vendors for more time to make their bill payments and also asking for loans so that they can keep afloat until they receive payments from their clients.

“Small businesses have been forced to reach out to trade creditors and begin to utilize them as bankers,” says Lyle P. Wallis, vice-president, Credit Research Foundation. But the real difficulty arises with trade creditors slashing their loan amounts to borrowers. A microscopic analysis of creditors is being done by vendors before lending out loans to their customers. Gray Desilets, who runs a $2 million construction business witnessed a slash of credit line from $200,000 to $20,000 from the company that sells him building materials and $20,000 to $8,000 from Home Depot. Trade-creditors have increased their use of scoring tools as well. Products like ‘Dun & Bradstreet’s’ credit reports and ‘Experian’s Predictive Metrics’ have seen client inquiries triple in the last three years.

Earlier, it was possible for small business owners to work out a deal with suppliers that enabled them to clear their debts slowly. But now such negotiations are long gone, as trade creditors are taking steps to cut off customers who are less likely to pay bills. Trade creditors do however fear that by doing so, they might completely lose their customers. As Rob Olsen, chief risk officer at WXS, says “Trade creditors have to step in or they lose the sale.”

Credit unions are lobbying Washington to lift the cap on lending rules that have been in effect for 12 years. Currently, credit-union lending is limited to 12.25% of a credit union’s total assets. The Credit Union National Association is pushing to raise that limit to 25% of total assets.

The vast majority of credit-union loans go to small businesses. CUNA estimates that a change in the law would enable them to extend up to $10 billion in additional business loans.

Banking lobby groups oppose the legislation, saying that an increased cap would create a distorted competitive environment detrimental to community banks, also big lenders to small businesses, according to an article in the Wall Street Journal.

Credit unions were created to provide financial services to people of modest means, and members pay a small fee to join. They are member-based organizations with non-profit tax status – another bone of contention for the banking lobby. Credit-union lending to small businesses increased in 2009, while lending by community banks decreased, according to the WSJ.com article.

Banks contend that there is not enough oversight on credit-union loans, so customers are more likely to default on their loans.

Small business owners who were approved for credit-union loans after being turned down by banks said they faced a rigorous application process at the credit unions.

Matthew Rembe, owner of Los Poblanos Inn and Cultural Center in Albequerque, received a $3 million loan from a credit union to expand his business after a year of getting turned down at banks.

“There was major due diligence,” Rembe told the WSJ.com. “In the past we’d gotten easy money, so it was not what we were used to at that point.”

Dell Inc. has spent the last year trying to improve its small business sales, and it appears the strategy is paying off for the PC maker and small business owners, says the Wall Street Journal.

Dell is the number one provider of personal computers to small businesses, and in an effort to maintain that customer base, the company is offering more credit and discounted services to small businesses. Some of those deals include interest-free credit on purchases over $25,000 and free or discounted computers if a small business buys other products, says the Wall Street Journal.

Those efforts seem to be working, as Dell’s small and medium business units posted a 10 percent gain in revenue in the fiscal fourth quarter over last year, said the Journal.

Bank lending to small business has been tight, and Dell extends most of its $7 billion of available credit directly instead of through traditional loan providers. The company told the WSJ that about 22 percent of its small business customers rely on store credit for purchases.

The strategy may prove risky for Dell if those customers default on their loans. To minimize that risk, Dell asked some of its customers to teach salespeople about small business budgets. A Dell spokesperson told the WSJ those training sessions have helped the company evaluate credit risks.

Tax time can be scary for small business owners. If you’re a busy entrepreneur and haven’t kept the best accounting records throughout the year, there’s still time to save yourself some grief and make next year a little easier. Also keep in mind that if you don’t have a good handle on your business’s finances, the more likely it is to fail.

Associated Press business columnist Joyce Rosenberg has these tax tips for small business owners:

* Get organized. Invest in accounting software that will keep you organize. You can input information from all those receipts and invoices into the program and send a file to your accountant at the beginning of the year, saving yourself a whole lot of time and grief.

* Hire a bookkeeper. If you can’t afford to hire a bookkeeper, consider getting an intern, such as a student studying accounting at a local college and have them set up a ledger system. Also consider putting all business expenses on one credit card.

* Read your mail. This sounds obvious, but again some business owners are so busy, sorting through mail can be a chore that gets pushed to the back burner. Not opening important mail from the IRS can lead to penalties and fees down the road.

* Listen to your CPA. Start talking to your accountant now. If you don’t understand what he is saying, ask. Remember, there are no stupid questions, only stupid mistakes.

Despite pressure from the Obama administration to pump up small business lending, the country’s biggest banks cut small business lending by $1 billion in November, according to a Treasury report released Jan. 15.

The 22 banks that got the most help from the Treasury’s bailout programs have cut their small business loan balances $12.5 billion since April, when the Treasury began requiring them to file monthly reports, according to CNNMoney.com.

Bankers defend the cuts, saying small business loans are too risky and fewer entrepreneurs are seeking credit because of the recession.
But many small business owners say lending standards have grown more restrictive the past three years, and a report from the Federal Reserve backs that up, said CNNMoney.com.

Earnings at most big banks have turned around. JPMorgan, for example, reported earnings of $3.3 billion in the last quarter of 2009.

A number of politicians including the president have railed against bank executives for their unwillingness to free up credit while continuing to dole out huge employee bonuses.

Rep. Peter Welch, D-Vt., introduced a bill calling for a 50 percent tax on bonus compensation in excess of $50,000 at banks that received government bailout money. All revenue raised from the tax would go directly to the Small Business Administration to fund a new direct lending program, said CNNMoney.com.

Small businesses are traditionally the first to start hiring during an economic recovery, but that doesn’t seem to be the case this time around. Many small business owners say the credit crunch is a major reason they won’t be hiring anytime soon.

With little funding available, small businesses will rely more on temporary hires and independent contractors, says Business Week.

And in companies of all sizes, existing workers will just be expected to do more.

Daniel W. Glier, president of Glier’s Meats in Kentucky, an 18-person, $3 million sausage maker, told Business Week he’s keeping headcount down by restoring some workers’ hours that got cut earlier this year. He’s also using temps so that if he has to let them go, his unemployment insurance premiums won’t rise. “I’m not going to stick my neck out right now and hire people,” he told the magazine.

The good news, however, is that the number of layoffs at small and mid-size businesses are shrinking. Companies with less than 50 workers shed 75,000 jobs in October, down from 288,000 in March, said Business Week.

Several small business owners met in Washington last week with Treasury Secretary Timothy Geithner and Small Business Administration chief Karen Mills to talk about their struggles during the worst economic crisis since the Great Depression.

The business owners discussed trouble getting credit and government regulations they said are hampering their operations, among other topics.

Woody Hall, the chairman and president of Diversapack, a film manufacturing company operating in several states, said the credit crunch is hampering his company’s growth. “We just opened up a new manufacturing facility employing 50 employees and expected to grow to 150 over the next few years. We basically had no bank financing,” Hall said, according to the Washington Post.

Former chief economist for the World Bank Joseph Stiglitz said exorbitant credit card fees are hurting small businesses and the government needs to address that. According to the Washington Post, Stiglitz said the exchange fee on purchases is “a 2 percent tax on all small businesses. A lot of them have small margins. Imagine you’re got a small margin and you’re giving half of that to banks on exchange fees — how aggravating.”

Geithner acknowledged the government needs to find a way to compel banks to extend more loans to small businesses.

If you’re like many small business owners who want to take advantage of social networking as a marketing tool, building a Facebook page is a good place to start.

New York Times business columnist Kermit Pattinson offers the following tips for launching a Facebook page and using it to market your business:

1.Start small and hone in on your main objective. Are you trying to build brand awareness? Create an online customer service site? Or maybe you want to focus on direct sales. Ask your friends, family and best customers to sign up as a fan of your page when it launches so it can begin to grow by word-of-mouth. Because there are so many tools available on Facebook, you can quickly get off track. Make sure your content is lively and the page reflects the personality of your business.

2.Don’t think of the page as just a sales tool – use it to interact with customers by asking for information and responding to their complaints. Keep content fresh with status updates and newsfeeds to tell fans about specials, events, contests or anything else of interest. This can take a lot of time but the payoff is often worth it.

3.Facebook allows for better target marketing. Facebook users fill out profiles with information like hometown, employer, religious beliefs, interests, education and more so you can get your message to your target market. When you create an ad, you can add demographic criteria and keywords and see how many Facebook users fall into your target audience and modify it accordingly. Advertisers can choose to pay per impression or per click, set maximum budgets and schedule the ad to run on specific dates. The Facebook ad system also provides instant feedback with metrics like the number of impressions and clicks-through.

The number of pink slips small businesses are handing out are on the decline, but they’re still not putting out the “help wanted” signs, said an article on CNN.com.

Small businesses hit hard by the recession have had to trim their budgets, which includes whittling down staff. Since early 2008, small companies have eliminated about 2.6 million jobs, according to payroll company ADP.

ADP said businesses with fewer than 50 employees cut 75,000 workers in October, but that number is the smallest number of job cuts in a single month since July 2008, said CNN.com.

In a recent telephone survey conducted by management consulting firm George S. May International, 74 percent of the small business owners polled said they didn’t plan any new hiring in the next 90 days.

Small business owner Jennifer Hason, who runs a Pennsylvania bakery, has filled her labor gap by working with participants of Job Corps, which provides job training skills to 16 to 24 year olds from economically distressed areas.

Job Corps students work on location for six weeks unpaid with the possibility of getting hired if a position becomes available. Hason has hired two Job Corps students as full-time employees.

“It is my absolute dream,” Hason told CNN. “I get to teach and I get to have assistance — essentially financial assistance — from this program. It is unbelievable.”