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Sunday, November 08, 2009
Credit freeze-out
By Winthrop Quigley
Journal Staff Writer
As the global credit crunch enters its second year, even profitable small businesses are struggling to get financing.
A Federal Reserve survey of senior bank lending officers during the third quarter showed that 35 percent of banks had tightened loan standards to small businesses, 65 percent were charging more for loans, more than half had increased charges for credit lines, and what the Fed called a "significant" number of banks had decreased the lines of credit they granted to existing small-business customers.
"My job is trying to help people get money," said Ray Garcia, director of the Small Business Development Center in Albuquerque. "I've had several deals that won't go through. All credit is tighter than hell."
"We work with a lot of bankers," said Agnes Noonan, executive director of WESST, a statewide economic development organization that helps entrepreneurs launch their businesses. "They sit on our loan committees. What we've been hearing for some time now is that long-term clients of some of these banks have not been able to return to their bank for additional capital."
"Or their lines of credit have been frozen so they can't access them anymore," added Kim Blueher, WESST's director of lending. "Or (the banks) turn (lines of credit) into term loans."
Nationally, nearly a third of small businesses say limits on their lines of credit or their business credit cards have been reduced, according to a National Small Business Association survey.
This comes as no surprise to Stuart Gorelick, owner, with his wife, Karen, of Sandia Computers. His 26-year-old company has posted record profits in each of the past three years, it has booked a 40 percent increase in revenue over that period, it has increased staffing 33 percent to handle business growth, and early this year Gorelick's bank refused to renew his line of credit.
The result? "I'm turning away business I didn't used to turn away," Gorelick said.
Sandia Computers builds many of the products it sells. Gorelick said he normally tries to design and build 22 new notebook models in the course of the year. A prototype costs about $35,000. He supports his computers with parts for at least seven years. To pay for it all, he would keep a bank line of credit of $100,000 to $150,000. He would draw it down and repay it very quickly with proceeds from sales.
This year Gorelick expects to build only 15 new models.
Recently a law firm ordered $60,000 worth of computers. Normally, Sandia would build its own computers to fill the order, but without the line of credit to pay component suppliers, Gorelick turned the hardware order over to a manufacturer. Sandia will provide installation, service and support.
"I've been with this bank for 15 years," Gorelick said. "There have been no problems. No issues. No late payments. The banker knows us." He asked friends in business which banks are making small-business loans. "They're still laughing," he said.
Gorelick is financing Sandia Computers' needs out of his own pocket. "The owners are under tremendous stress," he said.
About 100 yards south of Sandia Computers on Wyoming NE, the Shell Rapid Lube store has been doing "very well," said its owner, Dale Erickson. "We've had steady growth, sustainable growth. I paid a lot more taxes last year than I ever have."
Erickson has a $22,000 bank line of credit that he almost never uses. He got it as an emergency fund for his light automotive maintenance shop. "Anything that moves oil or grease is incredibly expensive to repair or replace," Erickson said. "I could be looking at thousands of dollars in repairs needed in 24 hours to keep my business open."
The only time Erickson can recall using the line of credit recently was to replace the shop furnace. He paid the loan back within a month.
This year, he discovered his bank was charging a $150 fee to keep the line open. "That seemed excessive," Erickson said, so he asked that it be waived or reduced. When that request was refused, without explanation or the offer of a discussion with the bank manager, Erickson said he was considering closing his business accounts at the bank entirely. "They said, OK, fine," Erickson said. "I didn't like that at all." He applied at the same bank for a no-fee business credit card to replace the line of credit. That was denied. Erickson was told the bank just wasn't approving any new credit applications at all.
Erickson is trying to get a line of credit approved at another bank.
The banks' problem is that lines of credit are not secured, said Fred Bernson of BMC Capital. Regulators are requiring banks to shore up balance sheets damaged by bad real estate loans and other loans that have gone sour in the last two years. Meanwhile, the recession has hurt some businesses' sales, making some lines of credit more risky.
"It's a very complicated environment," Bernson said. "It's making things more difficult than they should be."
Options are few, though new federal action might make things a bit better. The Obama administration recently announced initiatives designed to improve small-business access to credit.
The government plans to provide low-cost capital to community banks that can increase small-business lending. The maximum Small Business Administration loan size will be increased and limits on the SBA's Microloan program will be increased from $35,000 to $50,000.
Meanwhile, businesses will have to get creative, Garcia said. One approach is to turn an asset into cash. A company can sell its accounts receivable to a factor, which is a firm that buys receivables at a discount from their face value. Any asset that isn't essential to the business could be sold to get necessary cash if the owner can find a market, Garcia said.
Current owners might have to pony up more equity to replace lines of credit, and existing owners may have to sell a portion of the business to get new equity investors, Garcia said.
Microlenders like ACCION New Mexico and WESST can sometimes make loans that bank commercial lenders will not. That could mean the business will have to borrow smaller amounts than the line of credit they are accustomed to, Blueher said.
Small businesses should not assume bank financing isn't available either. Jay Goltz, a small-business owner in Chicago who blogs about small-business issues, said that business people need to look at things from the banker's perspective. Just being profitable isn't enough, he said. Banks want to know how much debt the business already has and whether the cash flow is enough not only to keep the firm running but to pay off loans as well.
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