Small businesses looking to grow say they’re running into challenges when they seek financing: Loans are harder to secure, and sometimes are more expensive than before the recession.
Lending is picking up around the country. But it hasn’t thawed enough to spark meaningful job growth, and business owners and advocates say that’s a drag on the economic recovery.
Lenders say they want to do deals but that many businesses are hesitant to take on more debt. They acknowledge their standards are strict in the wake of a devastating financial crisis and tougher regulations. And some say they’re taking fewer risks.
One recent study found just 30 percent of small businesses that wanted credit would qualify for traditional or Small Business Administration-backed loans, with interest rates below 8 percent. Nearly half would have to turn to alternatives, such as unsecured credit, that can cost as much as 31 percent, according to the survey from MultiFunding, a Pennsylvania startup that helps businesses find the right lender.
Charlotte printing company Classic Graphics is familiar with the hurdles. When the company needed a $6.5 million loan for three new printing presses in 2005, owner David Pitts worked out the entire deal via email.
These days, “things I used to do in three weeks are taking 2 1/2 months to get done,” he said. “While we’re dramatically stronger, banks and other lenders … are so skittish, so cautious.”
Small businesses power the economy, with firms smaller than 500 workers employing half the country’s private-sector workforce. Those businesses experience greater job losses when the economy sheds jobs, partly because of their dependence on the larger firms they serve. But when the economy gains jobs, small businesses tend to lead.
Firms with fewer than 500 employees have seen gross employment rise an average of 8percent since the recession ended, compared to 3 percent for larger companies, data from the U.S. Bureau of Labor Statistics show.
Fueling that job growth is especially important these days, given the sense, among many, that the recovery is losing steam. Federal Reserve Chairman Ben Bernanke warned last month that some of the problems slowing the U.S. economy, from a weak financial sector to a struggling housing market, could persist into next year.
“Lending and access to capital is really the crucial element,” said Chuck Bamford, an entrepreneurship professor at Queens University of Charlotte, who predicts lending will gradually pick up in coming months. “The controlled approach means that we’re not going to roar out of this recession.”
MultiFunding Chief Executive Ami Kassar said banks should be doing more to help small businesses expand.
“If you’re one of the fortunate few who has equity left in your house, buildings, equipment, you can get some really wonderful, super-cheap loan rates,” he said. “Unfortunately, if you’re one of the most not in that situation, there are options, but it’s pretty expensive.”
MultiFunding’s first-quarter study, which surveyed 250 small businesses, found 15 percent wouldn’t qualify for any financing.
That’s keeping some companies from borrowing money, Kassar said.
“I don’t think it’s for lack of demand,” he said. “That’s baloney.”
Classic Graphics has pursued a few loans this year, ranging from $200,000 to more than $1 million — and each transaction has been “like pulling teeth,” Pitts said.
Securing financing means hours on the phone with lenders, more documents, more waiting and more vetting than ever before.
And despite the nearly 30-year-old printing company’s growth — it’s on track to hit $50 million in sales this year, up from $39 million last year — not every request is granted.
In one case, Pitts applied for a $1.2 million equipment loan, but his lender would finance only $800,000, leaving Classic Graphics to pay cash for the difference.
“But that takes cash out of the business that smaller businesses may need to operate,” he said. “I cannot imagine what it’s like for companies not at the top of their financial game.”
Newer companies and firms without much physical equipment for collateral also face challenges.
Five-year-old management consulting firm Big Sky Associates, which has nearly doubled in size each year, needed to expand its line of credit to cover payroll and other operations during gaps in business activity, as contracts are finalized and clients billed, CEO Hanno Ekdahl said.
The Charlotte company, which has 10 employees and about $2 million in revenue, approached its lender in late 2009, asking to increase its credit to $250,000 from $75,000. Too risky, the bank said.
“It’s frustrating, when you feel you have a good enough track record and then have someone say, ‘I can’t give you enough money to continue growing your business,’ ” said Ekdahl, who paid his employees smaller bonuses and deferred spending on marketing, public relations and recruiting as a result.
A year later, Big Sky reapplied for the larger credit line and succeeded, though not without a series of face-to-face meetings and plenty of follow-up questions about its financial situation, Ekdahl said.
The SBA is pushing banks to make more loans to underserved communities and those who want smaller loans — and it’s ramping up its own efforts to help, introducing new programs such as a streamlined lending process, officials there said.
SBA-backed loans are more popular among lenders in a down economy, as they help mitigate risk. The agency’s N.C. district director, Lynn Douthett, said lenders aren’t necessarily partial to particular sectors but that the SBA has noticed more loans going to professional and technical services businesses, as well as health care and social assistance firms.
Studies suggest others are being left behind: Minority-owned businesses have a harder time accessing capital, which has made it harder to stay afloat during the recession, according to a report last year from the U.S. Department of Commerce’s Minority Business Development Agency.
Those firms were found to pay higher interest rates on loans, were more likely to be denied credit and were less likely to apply for loans for fear the application would be denied, the report said.
Charlotte-area bankers say they want to make loans, as long as they’re confident in the business.
Activity is up at Charlotte’s NewDominion Bank, due in part to pent-up demand from businesses who delayed hiring workers or buying new equipment during the recession, CEO John Hipp said. Recent loan applicants have included accountants, consultants and construction companies, he said.
“Our pipeline, which is loans we are looking at, is as good as it’s been in probably three years,” he said. “I’m not saying it’s robust, but compared to 2010 and maybe 2009, it’s materially better.”
The bank is calling on companies and offering special pricing on owner-occupied loans, which are considered less risky. But it’s still evaluating potential borrowers carefully — looking, for instance, at whether the business has enough cash to fall back on if it loses a big customer, Hipp said.
Charlotte-based Bank of America Corp. extended $18 billion of credit to small businesses in the U.S. in 2010, up from $16.5 billion in 2009. In the first quarter of this year, it lent nearly $3 billion to small businesses, generally with less than $20 million in annual revenues, including $75 million in North Carolina, spokeswoman Nicole Nastacie said.
Bank of America has been a top SBA loan provider, by volume, and the company announced plans last fall to hire more than 1,000 small-business bankers across the U.S. by early 2012.
One challenge, though, is that demand remains weaker than before the recession, especially among businesses with less than $1 million in annual revenues, Nastacie said. She said the bank doesn’t have a lending goal this year but that it remains committed to serving small businesses.
At Wells Fargo & Co., new loan commitments to small businesses in the U.S. were up 27 percent in the first quarter from the same period last year, Charlotte region President Kendall Alley said. The bank, which bought Charlotte-based Wachovia in 2008, made 31,000 loans, totaling $3.7 billion.
Wells Fargo was named a top SBA lender recently. Activity is up in the Charlotte market, too, though it was still off by a third or more from pre-recession levels in the first quarter, he said.
The bank doesn’t have a lending commitment for 2011, but it expects to make more loans this year, officials said.
“My best analogy is that it’s been like a train” leaving the station, Alley said. “I don’t think we’re at full speed, but we’re certainly seeing the momentum and the energy.”
Smaller banks in the region are boosting lending, too, calling on potential customers, among other efforts to stir up new business.
Charles Stewart, Charlotte market president for Park Sterling, said his company has seen some improvement since the end of the first quarter. Things are picking up at Charlotte’s First Trust, too, though “we’re not ready to crack open the champagne or anything” yet, CEO Jim Bolt said.
Bamford, the Queens professor, said there’s a bigger appetite for creative, interesting business ideas, such as technology, energy and health-related firms, and less money being funneled toward the kinds of businesses that catered to the extravagance of the boom years, such as party planners and other entertainment companies.
Today’s tight lending standards probably will mean a longer recovery, he said. But Bamford expects that to ease as banks and businesses’ balance sheets improve. Higher standards also might lead to higher-quality businesses in the long run, he said.
“Quite honestly, this is good,” he said.
“What it might lead to is a much stronger, longer growth period.”
Source: McClatchy-Tribune Information Services.