Small Businesses Skittish on Borrowing

Small business borrowingWhen businesses of all sizes feel good about the economy, they borrow, expand and add jobs. But to many small companies, this is seen as a time to avoid debt, which likely means they aren?t growing.

Wells Fargo and Bank of America have recently hired thousands of small-business specialists who will look to make new loans to boost their banks? profits. As they add those workers, though, they face many clients who have little appetite for loans.

Business owners say their reluctance is based not on their own companies, but on uncertainty about the economy?s health. That is consistent with the sentiment expressed in national surveys of small businesses.

Mark Vitner, senior economist for Wells Fargo, said small-business owners are, in general, more reluctant to take risks than larger companies are.

?When it comes to borrowing money, small businesses tend to have a higher hurdle rate,? he said. ?They need to feel more comfortable about where the economy is heading.?

In the ongoing economic recovery, ?they?ve been particularly cautious.?

Small-business lending, he said, ?just pales in comparison to what we?ve seen in previous recoveries.?

On a national level, corporate and small-business loans have been rising since the recession, but not as robustly as lenders would like.

Banking industry officials have recently spoken about the challenges of getting businesses to borrow more.

Last week, the American Bankers Association?s chief economist wrote that while business loans have increased for 11 quarters in a row, the pace has slowed. For banks, increasing their revenue ?continues to be a struggle as businesses delay borrowing because of concern about rising health care costs, tax increases and the pace of our economic recovery,? James Chessen wrote. ?Until the fog of uncertainty dissipates, rapid loan growth is unrealistic.?

Lines of credit are going untouched, too.

Wells Fargo CEO John Stumpf, speaking at a conference in New York last week, said use of the lines is at a 30-year low.

?What usually happens is when companies start to think about borrowing, they use their own money first, and then they start to borrow against their lines,? he said. ?And we?re not seeing a lot of that yet. There?s still capacity left in plants and equipment.?

Kendall Alley, Wells Fargo?s Charlotte, N.C.-area president, said in an interview that many businesses aren?t interested in loans because they have saved cash during the recession. ?The application volumes haven?t gone back to the robustness that they had,? he said.

Last month, the National Federation of Independent Business released the results of its April survey of 1,873 randomly selected association members. Half said they do not want a loan.

Michael Bratt, senior vice president of operations and finance for licorice maker Lucky Country, which employs about 40 people at its Lincolnton, N.C., headquarters, said that for his company to feel comfortable seeking a loan, he would need to add a large client.

?We are taking a very conservative approach to lending at this point,? he said.

As some companies resist borrowing ? and banks push to strengthen earnings amid an era of record-low interest rates ? some banks say the competition is fierce for new clients.

This month, Wells Fargo announced that it added about 1,500 bankers who serve small businesses and consumers from March 2012 to this past March. In January, Bank of America said it reached its goal of hiring more than 1,000 small-business bankers.

?The banks ? are all chasing after essentially the same groups of customers,? said Vitner, the Wells Fargo economist.

Indeed, many businesses say the loan offers are attractive.

Refinancing deals are often designed to steal away existing loans. Once a bank snags a new client, it can sell them other products and services. For example, the bank might seek to get the company?s employees to open checking accounts.

Some small businesses say they are feeling the sales pressure.

?We do have a lot of banks calling on us. I get a lot of phone calls,? said Bratt, of Lucky Country.

?When banks come in to quote us terms, their terms are very aggressive,? he said. ?Interest rates are low. I would have killed for stuff like that five years ago.?

Wynn Davis, managing partner of Charlotte-based restaurant chain Mac?s Speed Shop, which employs around 250, said his banks are eager to lend him money, but he?s resisting. ?We?re trying to be careful,? Davis said. ?The less debt, the better.?

Keith Leggett, an economist for the American Bankers Association, said the addition of small-business bankers is a sign that those financial institutions ?want to make a bigger penetration into the small-business market.?

Greg McBride, senior financial analyst for, said banks need to add them before, not after, there?s a bigger appetite for small-business loans.

?If you?re going to gain market share, you?ve got to be staffed up,? he said.

Kim Reitterer, president of Charlotte-based Elm Engineering, which has 14 employees, is among small businesses deciding against growth now.

?Like many other small businesses, we are undercapitalized,? she said. ?There?s so much more we could do if we had more money for marketing, more money to expand our reach.?

George McAllister, regional director of the Small Business and Technology Development Center at the University of North Carolina-Charlotte, which offers training and advice for Charlotte-area small businesses that have roughly $5 million or less in annual sales, said many businesses are not ready to borrow, but: ?There are a lot of business owners who don?t think they qualify,? he said. ?Therefore, they don?t even ask. They might be right or wrong. Who knows??

All of this means a lot of business owners are not growing or hiring, McAllister said.

?So if you?re not growing, you?re not, typically, taking on more employees ? acquiring more assets and things like that,? he said.

For Reitterer, it?s simply not the right time to get a loan that requires her to personally guarantee it. It is not unusual for a small-business customer to secure a loan with personal assets, typically their home, as collateral.

?Since 2008 there have been a number of small businesses that have failed,? she said. ?Ours is not one of them. And we?re very grateful for that.?

Source: MCT Information Services