Small firms would hire you, if only they could get loans

McClatchy NewspapersMarch 12, 2010 

WASHINGTON — Capital is the oxygen that a small business needs to survive and thrive, yet across the country, the air's pretty thin, as business owners from coast to coast complain of huge hurdles to getting badly needed loans.

Jim Collins, co-owner with his wife Arlene of Quantum Energy Solutions, has been in business in Sacramento, Calif., since 1974. He has a $50,000 line of credit, backed by the U.S. Small Business Administration, through US Bank, owned by US Bancorp. He has a solid credit history and $30,000 in untapped credit.

Yet when Collins approached the bank about borrowing at least $500,000 to expand his 12-employee firm — which retrofits buildings with energy efficient technologies — he was rebuffed, told that his company lacks resources and collateral. US Bancorp declined comment.

Collins, 70, can't get the money he needs to hire five additional workers and ramp up marketing, even as the Obama administration promotes the "green jobs" of the future.

"The credit crunch is still there. It really impedes our ability to grow," he said. "I'd put five more people to work tomorrow."

Lending across the U.S. economy contracted 7.4 percent last year, the biggest such drop since 1942, according to the Federal Deposit Insurance Corp. That means $1.5 trillion in lending evaporated last year, the Treasury Department estimates.

Corporations are issuing bonds again, and large companies have access to bank loans, but it's still an uphill climb for the little guy.

"There's a big gap in access to credit for small firms now, and it's a huge problem," Karen Mills, the head of the Small Business Administration, told McClatchy. "We have a sense that the banks are not back to lending the way that they need to be, going forward."

Small businesses account for 65 percent of U.S. employment, so it's a serious matter that the credit is crunch squeezing these firms.

"If we're going to come out of this recession and get people back working, it's going to because we give small businesses the support that they need," said Mills, whose agency has guaranteed more than $22 billion in loans to small firms since early last year.

Blame for the crunch doesn't fall on banks alone. Large banks had $4.4 trillion in unused credit lines outstanding in 2009, as consumers and businesses shunned borrowing to pay down debt. A 32 percent increase in U.S. bankruptcy filings last year suggests that plenty of borrowers simply aren't creditworthy. FDIC data show through December that lenders in three major banking cities — Chicago, Kansas City and San Francisco — had more than 5 percent of outstanding loans late 90 days or longer.

"Lenders aren't saying we don't want to lend. Lenders are saying we'd like to lend, but loan requests are down, and also the bank regulatory agencies are scrutinizing loans at a much higher level than they have been in the past," said James Ballentine, the senior vice president of government relations for the American Bankers Association. "That, too, is understandable, because you want to make sure that all guidelines are being followed and the collateral is there, and that's a problem for many businesses as well."

Still, it's clear that small companies face huge hurdles when approaching banks for loans or even trying to tap existing lines of credit.

"The anecdotal evidence certainly suggests there's a credit crunch for small business. You can't prove it, but it's pretty hard to come down on the other side," said Douglas Elliott, a researcher at The Brookings Institution, a center-left policy research center in Washington.

North Carolina's Bob Kingery, co-founder of Southern Energy Management in Morrisville, near Raleigh, tells a story similar to that of Collins of Sacramento. His firm installs solar photovoltaic panels for businesses throughout the Southeast. In the past two years, about 15 projects have been scratched or delayed indefinitely as customers scramble for financing options.

The tight credit market has tied up about $30 million in business, Kingery calculates. Why? Banks categorize solar installations as construction outlays, he said, and "banks have a bunch of bad construction projects on their books."

A typical solar power installation for a small- to mid-size business costs anywhere from $100,000 to $2.5 million, financed through a combination of bank loans and tax credits. The tax credits can cut the cost of the project by more than half.

For a business to take advantage of the full tax credit, however, it has to have a tax bill of a certain amount. As the size of the tax bill shrinks with a drop in annual sales, tax obligations have fallen, and the value of the credit has diminished, sometimes by hundreds of thousands of dollars. To lenders, that makes the loans a riskier proposition.

Maria Fuenmayor prided herself on not relying on credit to run a family business, but when the housing market tanked in 2007, it dragged down her Miami-area flooring company, A Plus.

With annual revenue between $250,000 and $500,000, A Plus was suddenly on the ropes. The family turned to credit cards to survive.

"Our credit cards began to grow and grow until they were almost full,'' she said. "We were basically dead in terms of the business, because we needed money to survive the crisis."

Last July, Fuenmayor heard about federal American Recovery and Reinvestment Act loans for small businesses. She hired an accountant to complete the application and expected approval, but was rejected for not having pre-existing credit with a bank.

"I was so, so mad that they made me lose more money than I was already losing and, of course, my time,'" she said.

Fuenmayor wrote the White House 15 times, learned the program's deadline had been extended, applied at another bank and in February was approved for the loan.

"The fundamental characteristic of the small businessperson is you don't have any time,'" she said. "If the government makes the process complicated, people — even those who really need the loan — aren't going to be able to apply for it."

A Plus suffered alongside housing, a trend that continues, especially for builders and contractors.

"General contractors aren't finding credit any looser, either for them or the developers who then call them to put up a store, office space or apartment building," said Ken Simonson, the chief economist for the Associated General Contractors of America. "When somebody does pry loose credit, they have to put in 35 percent to 50 percent equity, which is just an incredibly high hurdle rate, especially when compared to the 10 percent to 15 percent that used to be the norm."

Even projects with sure income struggle to find financing.

"Even when you have a federal government agency that says 'we'll lease 100 percent of your building for 10 years,' so you know the income stream is assured, it still takes a lot of work to get the banks to come in," said Simonson. "And that's maybe because the regulators are telling the bank, 'Hey, you have too many non-performing or at-risk commercial real estate on your books now.'"

Regulators bristle at talk that they're discouraging lending.

"We've encouraged our banks to meet the creditworthy needs of their communities, but as you would expect in a difficult economic cycle, underwriting standards need to be maintained," said Bryan Hubbard, spokesman for the Office of the Comptroller of the Currency, which regulates 1,462 nationally chartered banks, including 35 percent of the nation's mid-size banks.

Some of the bank pullback makes sense, said David Wyss, the chief economist for the New York credit-rating agency Standard & Poor's.

"Generally, what I am finding around the country is that small businesses that have an established relationship with a bank, who have a good credit rating, are not having as much trouble getting credit. The bank has the money and is willing to give it to them," Wyss said.

The key, he said, is that track record.

"What the banks are saying is they don't see creditworthy borrowers out there looking for money. And part of the reason for that is they don't see as creditworthy anybody who doesn't have a strong history of credit relationships with them," Wyss said. "Those relationships have been broken . . . and they're hard to re-establish when regulators are looking for real proof that it's not a risk."

Accessing credit was tough but not impossible for John and Jill Matthews, who had to work for a loan to open their unconventional barbershop, even with a sterling credit history.

In March, the couple used savings and a loan from RBC Bank to open The CUT Barbershop in uptown Charlotte, N.C., where customers will be able to enjoy a beer, watch sports and listen to rock 'n' roll while getting a haircut.

John Matthews, whose last job was at a hedge fund in California, said owners of small firms need a solid business plan and a can-do attitude. He compared the loan search to the scene from the movie "Jerry Maguire," where the sports agent played by Tom Cruise famously screams "help me help you" to an athlete.

"The bank is saying the same thing," Matthews said. "After all, banks make money by loaning money. ... They just need a little more help nowadays."

Jill Matthews said the shop's high-traffic location and her experience as a haircutter helped pry loose lending.

"The banks don't want to take a chance on anybody that might fail," she said.

(Christina Rexrode of The Charlotte Observer, Jim Wyss of The Miami Herald, Dale Kasler of The Sacramento Bee and John Murawski of The Raleigh News & Observer contributed to this article.)

ON THE WEB

FDIC bank data

New FDIC state profiles

State by state bankruptcy data

SBA and the stimulus

ON THE WEB

To ask a question about this story or any economic question, go to McClatchy's economy Q&A

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