The fate of small businesses across Minnesota may ride on the solution U.S. Treasury Secretary Henry Paulson and other world leaders craft this weekend to restore confidence in global financial markets.

Consider the case of Apple Valley gelato makers Douglas and Patricia Schulte. If they could just find a loan, they might get their two-year-old start-up, Luxury Sweets, back on track. Slow sales forced them to close their store last month, but an area grocery chain has since approached them about putting their Italian ice cream in its stores.

Patricia Schulte estimates they need a loan of $50,000 and $100,000 to crank their operation back up. But the couple ran out of money at just the wrong time. How have lenders been reacting to their requests?

"Zero response. Nothing. Nada. No help. Nowhere," Patricia Schulte says.

The financial crisis that began in the United States with questionable loans to shaky borrowers circled the globe at warp speed last week, sending financial makets cratering.

But the bigger threat to the nation's economy has been building for months on Main Street, where small businesses have found it much tougher to get the money they need to expand and add jobs. Banks, unsure about the health of their own investments or those of their customers, have sharply curtailed lending, nationwide and in Minnesota.

That has economists worried that the U.S. and other economies could be facing a deep, prolonged recession.

A Federal Reserve Bank poll of loan officers across the country, out in August, showed 65 percent are tightening credit to small businesses. In Minnesota, banks spent the past year pulling back on U.S. Small Business Administration (SBA) loans. In the year ended Sept. 30, they gave 2,128 loans, 20 percent fewer than last year. The value of those loans, $502 million, was down 12 percent compared with a year earlier.

Desperate times

It's desperate times for small entrepreneurs, said Christine Pigsley, an associate dean at the Dakota County Technical College in Apple Valley and director of the South Metro Small Business Development Center. The locked-down financial markets are forcing abrupt stops to promising start-ups and dangerous decisions by small business owners -- such as paying bills with credit cards because it's the only money to which they have access, Pigsley said. "What started on Wall Street is ending at strip malls in Apple Valley," she said.

The small business community wants more out of Washington. The Alliance for American Manufacturing is recommending infrastructure projects -- such as highways and bridges -- to create jobs and a market for U.S.-made materials such as steel and concrete. And instead of focusing on the stock market, state and national business organizations are telling regulators to concentrate on the financial marketplace where banks get their money.

"Everybody understands it will take time for the Dow to go up 500 points," said Bill Blazar, a senior vice president at the Minnesota Chamber of Commerce. "What our members are looking for is some tranquility in the financial markets, so when they go to their banker, that banker feels confident enough to do business with them."

Minnesota's two biggest lenders in the SBA-guaranteed program passed out about 20 percent less money in the past 12 months than in the 12 previous months. U.S. Bank made 364 loans totaling $39.6 million; Wells Fargo fell to $40.2 million in 201 loans.

Nervous business owners

Both banks defend their records. Tom Burke, Wells Fargo senior vice president, said its SBA loans are down because nervous business owners aren't asking for them. "We have the money; we're not seeing the applicants," Burke said. It may be harder for some to qualify, too. The bank's lending standards haven't changed, he said, but applicants may have already tapped out one of the favorite forms of collateral -- their homes. "And to apply for an SBA loan you have to have good credit; if people are late on their home or car loans, that's an issue," he said.

U.S. Bank has granted another $21.6 million in loans outside that SBA program to Twin Cities small businesses so far this year, said Christine Hobrough, senior vice president. "I think everyone would agree that overall activity has been impacted by the economy and the stress on the market, but there's still credit and we're still making a lot of loans," Hobrough said.

Pigsley, who helps entrepreneurs write business plans and get them funded, said the economy is only part of the problem. Banks just are unwilling to take the risks that they used to. Enterprises that would have sailed through to loan approvals 18 months ago can't borrow a dime these days, she said. A recent casualty was a beauty-supply start-up.

"It was a good plan, and these were people who had a lot of the up-front cash themselves, but it is a risky line of business," she said.

Another start-up -- a couple trying to flee the faltering airline business by starting a relocation service business in their home -- still is working its way down Pigsley's hierarchy of lending possibilities.

In the old days, entrepreneurs with a good business plan went to three bankers, then chose among their offers. Now, Pigsley has them start with at least seven banks. If that fails, they move on to credit unions, asking for a commercial loan. If that fails, they try for a personal loan. If all that fails, they go to nonprofit groups that give micro-loans.

More micro-loans

At one such group, the Northeast Entrepreneur Fund in Duluth, director Mary Mathews said applications are indeed up. She granted 27 micro-loans in the past six months, compared with 21 a year earlier. Mathews manages a $3.5 million revolving fund, with some government and some foundation money. One recent caller, a local businessman, had secured a seven-year line of credit from his bank three years ago, and used some of the money to buy equipment. Now the bank is canceling his credit and telling him to pay his balance in full.

"He had been making regular and timely payments," she said.

To Pigsley, the Schultes are another sign of the times. The couple, who started as an online confections retailer, then expanded to their own shop, have now had to pull back to their online business again.

"These people did all the right things, but when they're offered a chance to expand their retail business to wholesale, they can't get any working capital to take advantage of an opportunity," she said.

H.J. Cummins • 612-673-4671