FORT WORTH — President Barack Obama's calls for banks to extend more loans to small-business owners come too late for Tari Dudley, who said she was even turned down for a loan backed 100 percent with a $30,000 certificate of deposit, a fraction of what she was seeking.
Starting in December 2008, Dudley tried to get financing for a woman-owned, woman-friendly auto repair garage by approaching a large national bank where she had been a customer for 24 years. She had $47,000 in assets and was told that her credit score was excellent.
But the loan officer didn’t bother to hand her an application, she recalled.
Instead, he wrote her name and phone number on a 1-inch adhesive note. "That was it," Dudley said, adding that she felt insulted and certain that the scrap of paper would be thrown away.
Two community banks said they liked the concept of a repair shop geared toward women and gave her loan applications. Each then mulled over her request for $250,000 for three weeks before turning her down.
Dudley is far from alone. Small businesses have felt the pinch as banks have been extra careful in the wake of the financial industry’s near meltdown — billions in loans were made to poor credit risks, sometimes bundled as packaged investments with fancifully high ratings. Now banks are demanding heightened creditworthiness and more collateral.
A December survey by the National Federation of Independent Business found that borrowing conditions continue to be difficult, with 15 percent of respondents reporting that loans were harder to get in their last attempt.
"Twenty-four months of recession have sapped the financial strength of many small firms," the group said. A third maintained regular borrowing.
Whether or not big banks have been put on the defensive by public opinion and the White House, ad campaigns have been launched and statements issued saying they are ready to lend. On Nov. 9, Chase said it will increase small-business loans by $4 billion in 2010. On Dec. 14, the day the president met with top bankers, CIT Group publicly committed $500 million in new small-business loans and waived $1,000 "packaging fees" on some products.
"Lending had been looser than it should have been, and now the pendulum has swung the other way," said Scott MacDonald, director of the Southwestern Graduate School of Banking at Southern Methodist University.
"I say the spigots are open, but not as open as they were two years ago," MacDonald said. "Big banks just don’t have the capital levels, and some regional banks are lent-out. They’re maxed, maxed. They can’t make many more loans."
Before, banks were criticized for making loans with zero collateral. Now, they are criticized for demanding that borrowers put more skin in the game. "This means fewer and fewer people can qualify," he said. "That’s just realism.
"I am going to argue that banks are doing the absolute best they can to get money out there," he added. "Some are just coming up against brick walls."
The Federal Deposit Insurance Corp. has released figures indicating possible increases in new loan activity in the third quarter ending Sept. 30. Loan balances were up at 66 percent of Texas community banks, defined as lending institutions with assets of less than $1 billion. By comparison, 56 percent of community banks throughout the country reported higher loan balances and just 34 percent of U.S. banks with more than $1 billion in assets.
Michael Mushegan was among the fortunate loan seekers that quarter.
He bought a profitable business in Tarrant County that installs commercial and residential air-conditioning systems. Aside from a high personal credit score, he had grown up in the industry, his family having operated a similar business in Arizona. Moreover, Mushegan had a degree in finance from Arizona State University.
"I was told that industry experience was crucial, and they said my credit was outstanding, which also was extremely important," he said.
Mushegan had shopped around for the loan. He got the feeling that his own bank wasn’t primed to extend financing judging from the lack of detailed questions, he said. He heard that another large national bank, Wells Fargo, was heavily involved in loans guaranteed by the federal Small Business Administration.
"Wells Fargo told me it would be a very quick approval, and we hoped to close early to mid-May — right before the air-conditioning season," Mushegan said.
Just about then, however, the federal stimulus package eliminated many fees on SBA loans, creating a flood that overwhelmed the processing system. The package also added enhanced requirements in exchange for the federal agency guaranteeing 90 percent of the bank’s loan.
Instead of 10 days, SBA approval took 2 1/2 months, he said. Among new provisions, an independent appraisal of the company’s worth had to be taken since the SBA would no longer rely on the bank’s valuation. "And they required me to have life insurance [to cover the loan], which Wells Fargo had waived."
With Mushegan putting down 15 percent of the company’s purchase price, the loan finally closed July 24.
Unlike Mushegan, Dudley had no experience in the auto-repair industry. She planned to operate it with her son-in-law, Aaron Phelps, 32, who had owned a swimming pool cleaning business.
He enrolled in a technical college after the recession depleted his customer base and became a trained mechanic. While he had run a pool maintenance business, he had not operated a garage, although he had worked on cars most of his life.
"Experience goes a long way," said Greg Morse, CEO of Fort Worth’s Worthington Bank, not one of the lending institutions contacted by Dudley.
"Say someone comes in and says, 'I want to start an ice cream shop,’ I’ll ask, 'Ever run an ice cream shop?’ If the answer is no, that’s a rejection," said Morse, who is collaborating on a book, tentatively titled 21 Ways to Get to Yes with Your Banker.
If the would-be borrower has the prerequisite industry background and solid credit, Morse recommends that he or she should get to know a banker or two. And always treat the entire bank staff courteously.
As for Dudley and Phelps, they decided to plunge ahead with the woman-friendly auto repair concept, even after an investor who promised $30,000, then $10,000, backed off. The two pooled their resources: Dudley emptied her 401(k) retirement account and threw in her severance pay; Phelps and his wife, Stefani, chipped in their savings.
Some $80,000 of the $250,000 in estimated start-up money was to have gone for an expensive diagnostic device, an engine dynamometer. That was cut.
They have spent upwards of $30,000 since opening July 1 with two employees and have a charge card with a $12,000 credit limit.
A site in North Richland Hills fell through, but the pair found another location in Fort Worth, at 3777 N. Beach St. near Long Avenue, where they opened Aaron’s Automotive and Performance Inc.
Their timing was off. This summer saw the popular Cash for Clunkers program and potential customers traded in their old cars for new models instead of getting them fixed, Dudley speculated.
Customers are trickling in. But their stated policy of honest dealing has led them to acknowledge that they’ve found nothing wrong with several cars brought in with suspicious symptoms. Otherwise, they charge $80 an hour for labor, lower than most dealerships.
"We’re keeping our head above water," Dudley said as she and Phelps filled small bags with sweets and business cards, beverage koozies and pens bearing the Aaron’s logo to hand out as promotional (and low-cost) gifts to nearby businesses.
"It’s all about cash flow. I can’t put a big sign out because we don’t have the money. I can’t advertise. So we’re putting candy in bags."