Lending is lifeblood for small businesses
Tripp Clark learned a hard lesson about starting a new business.
Local banks turned a cold shoulder when he and his business partner, Tim McLaughlin, sought financing to start 321 Blink, a video production and marketing company in Aspinwall. They eventually had to lean on family and friends for money to get the company off the ground.
While many small businesses nationwide are facing similar difficulty raising money to start up or grow, as well as uncertainty from the slow-growth economy, the Small Business Administration says lending in its most popular programs is at its highest levels since the Great Recession. Experts say that for each small business that can't get a loan, there are a dozen or more that can and do from banks and alternative financing sources that are increasingly available.
The federal agency is celebrating National Small Business Week across the country this week and in Pittsburgh on Thursday as part of a daylong event that features SBA Administrator Karen Mills and other business advocates at Pittsburgh Technical Institute in Oakdale. Hundreds are expected to attend sessions on entrepreneurship, finance, exporting and more.
“Banks don't want to talk to a business that's less than two years old. ... That was an obstacle and an eye opener,” said Clark. His business still can't afford benefits for employees.
Even so, 321 Blink's staff has grown to a half-dozen as it added business from Giant Eagle and American Eagle Outfitters and benefited from goodwill gained by doing work for local nonprofits for free. Things are improving to the point that Clark has hired a business consultant and a payroll company to keep the books.
For others, the ability to get a bank loan can mean saving jobs.
An SBA loan helped Jamie Kerestes, president of North East Medical Solutions in Monroeville, rescue the company she founded in 1998 when it was hit by recent changes in the region's health-care industry.
A $1.2 million loan through Huntington Bank enabled her to acquire a company in Ohio last year and replace 60 percent of the business lost when physician practices she served were acquired by UPMC and Highmark Inc. The loan provided cash so the company could operate as it changed strategy.
“We employed about 90 people at the time and would have had to lay off half,” Kerestes said.
According to the SBA, the 23 million small businesses in America have accounted for 66 percent of all new jobs since the 1970s.
To help recovery from the recession, the SBA increased maximum loan amounts and offered no-fee loans for an 18-month period, among other incentives, in the Small Business Jobs Act of 2010. Loan volume in fiscal year 2012 hit $30.3 billion, just below 2011.
Still, small businesses and their advocates say that credit is hard to get.
It's very frustrating for many, said Marilyn Landis, owner of Basic Business Concepts Inc. of North Side, and vice chairwoman of advocacy for the National Small Business Association, a nonprofit that represents about 150,000 small businesses nationwide.
“Bankers say they've got a lot of money to lend but nobody's coming in to borrow,” Landis said. The reality is that banks are making loans based on real estate as collateral, but that represents only about 2 percent of the loans needed by small businesses.
Businesses that don't need a new building do need working capital, she said, which “is almost impossible to find these days.” And they are increasingly turning to alternative lending sources.
One is high-net-worth individuals who make loans. Others include companies that provide receivables financing. A website named The Receivables Exchange enables the sale of invoices by small businesses that need cash to operate.
“The bankers will shake their heads and say businesses are playing with the devil, but people are going to those markets,” Landis said.
Sam Houston, Huntington Bank's manager for business banking in Western Pennsylvania, eastern Ohio and West Virginia, said he hears all the time “that banks aren't aggressively lending.”
It's true that loans for startups “is not a business that a lot of banks want,” he said.
The Columbus-based bank's 128 SBA-backed loans were the most in the Pittsburgh region in the year ended Sept. 30, worth $21.1 million, the second-highest in total value, the agency's data show. The bank's $417.4 million in SBA loans across its six-state franchise ranked third-highest in the nation.
“We are aggressively trying to lend. Not every deal is perfect, but we have a completely dedicated team,” Houston said. And for every SBA-backed loan, it makes another three to small businesses, he said.
Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, said the public tends to overlook the fact that the SBA is largely irrelevant in the overall small business lending market.
“Even in good years, loans and money provided by the SBA is roughly 1 percent of total small business loans made in a year,” she said. “More than 95 percent is done by the private sector. That puts the SBA's role in perspective.”
Banks are motivated to make SBA loans because of loan guarantees they receive. “Banks make a pretty significant profit on SBA loans that they don't on other loans,” de Rugy said.
The most popular SBA loan provides a guarantee for 85 percent of amounts up to $150,000 and 75 percent for those greater than $150,000. The maximum standard loan is $5 million.
“It's almost risk-free for the bank. I'd expect I would do it because so little risk is assumed by them,” de Rugy said.
John D. Oravecz is a staff writer for Trib Total Media.