Recession a hurdle for small business owners seeking credit to operate
The Great Recession that technically ended in mid-2009 still haunts small businesses, making it tough -- to almost impossible -- for many of them to get credit from a bank.
Just ask Max Starks III, a civil engineer for 39 years and president of Starks Engineering Consultants Inc., a Wexford-based company that provides civil engineering and construction management services.
"For the past 25 months, I've tried to secure funds from six different lending institutions nine different times," said Starks, father of the Pittsburgh Steelers offensive tackle. "That's a lifetime when you're operating week-to-week."
He is hardly alone. A lending index by Paynet, which tracks commercial loans, shows small-business lending nationwide has not picked up since the financial crisis began in late 2008. The Chicago area firm's index peaked in fourth-quarter 2008 at 115 as the financial crisis hit and then dropped to 75 by first-quarter 2010. Since then, it has fluctuated between 70 and 75.
In the Pittsburgh area, data from the Small Business Administration show government-backed loans picked up in the fiscal year ended Sept. 30. But the year's 446 loans, worth $124.3 million, were fueled by a one-time increase in federal loan backing (to 90 percent from the traditional 75 percent) and temporary waiver of the 3 percent borrower fee.
Now that those incentives are pared back, area SBA lending has returned to recession levels. SBA loans in Western Pennsylvania fell 22 percent to $56.1 million in the six months ended March 31 from $72.1 million the year earlier, agency data show. The number of loans fell by 26 to 209 in the first half of this fiscal year from 235 the year earlier.
The SBA's Pittsburgh district encompasses 27 Pennsylvania counties from Altoona to the Ohio border, including north to Erie. District Director Carl Knoblock thinks SBA lending in the second half of the year ending Sept. 30 will probably "be about the same," he said.
Experts say a big reason small-business lending has hardly budged is the effects of the recession itself. Banks traditionally want applicants for business credit to supply three years worth of financial information, such as sales, profits and payments history. But three-year snapshots still include recession-battered financials.
"It's not the banks' fault or the small businesses' fault -- it's the recession," said Marilyn Landis, president of Basic Business Concepts Inc., a small-business consultancy on the North Shore, and a former commercial lender with Mellon Bank.
Most small businesses ride out typical recessions by digging into savings, selling investments and tapping friends and family for funds, Landis said. But this past recession was deeper and more consequential for small business.
"Today, business savings are wiped out, and their investments and property have declined in value," she said. "The things small businesses rely on (for funds) have been taken away by the recession."
Declining commercial property values hurt because they leave small businesses with less-valuable assets to borrow against. Plus, regulators are discouraging bankers from lending for many commercial property deals because they see the real estate collateral is not worth enough for the bank to risk making the loan.
"You want good, solid underwriting and reasonable underwriting standards for things like collateral and cash flow," said Paul Merski, executive vice president and chief economist for the Independent Community Bankers of America.
"But because of the continued weakness in the economy, many businesses don't qualify for credit," Merski said. "And the increased regulatory scrutiny makes it even more difficult to extend credit than it was in the past."
Take JoAnn Forrester's business consultancy in Brookline. She tried to extend and increase S.I. Business Associates' line of credit at her bank a year ago. It refused her request, and instead, would only offer a 5-year-term loan with 6.5 percent interest.
"Even though that's a reasonable rate, it's a chunk of interest I pay every month," said Forrester, whose monthly payment is about $700. "That's enough for a part-time person, and I could use the clerical help."
While community banks still consider small-business lending their "bread and butter," larger banks are less inclined these days to make smaller loans, experts say, unless the business hands the bank most or all of his banking business.
"Banks really want high-growth companies that will need significant enough financing to make it worthwhile for them," said Mary McKinney, director of Duquesne University's Small Business Development Center. Many banks "don't want to be bothered with some loans," she said.
Meanwhile, following nine rejections from banks citing things such as "insufficient cash flow," civil engineer Starks expects any day to close on a $50,000 loan at a local bank, which he'll use for operating expenses.
"Lending is beginning to loosen up a bit, but people have to remember how bad it was in 2009," said Bob Coleman, editor of the Coleman Report, a La Canada, Calif.-based publication that tracks SBA loans.
"Lenders say they don't have enough good-quality applicants, and Main Street says there aren't enough lenders providing small-business loans," he said. "Is that a supply problem or a demand problem?"
Bankers offer these tips for improving your chances of getting a small-business loan:
• Get to know your banker. Banks are more willing to lend if they have a relationship with you, understand your business and how you plan on achieving your goals.
• Research the bank you will be approaching. Does it participate in SBA loans? What does its lending portfolio look like?
• Plan for the unexpected. Understand how your business would be positioned for another downturn in the economy.
• Take the long view. Have a one-year and a three-year business plan ready.
• Demonstrate consistent cash flow. Remember, a bank is not an equity investor with an appetite for risk.