Banks shine a light on why small business lending lags

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Shop Foreman Jim Leidenheimer changes oil, checks brakes and balances tires at Honest Accurate Auto Service, 3905 Tutt Blvd. The auto shop owners took out a Small Business Administration loan through Central Bank & Trust in Colorado Springs in 2010 to build their second location.

Local bankers say they are eager to make loans to small businesses. Trouble is, not many small businesses are asking.

Instead, small businesses are putting off expansions and renovations, waiting for the economy to turn around.

“Small businesses don’t know where this economy is going — they are sitting on the sidelines waiting for a sign,” said Michael League, president and CEO of 5Star Bank in Colorado Springs. “People are being cautious.”

Across the country, small business loans are down — $43 billion from 2009 to 2010, according to a March report from the Small Business Administration.

“It’s not necessarily a credit availability issue,” said Ed Sauer, president of The Bank at Broadmoor. “It’s a lack of borrowers.”

For some time now, bankers have been fighting a national and local perception that lending to small businesses is down because banks are being stingy, holding back loans to small businesses. Some of the problem might be unrealistic expectations — by the lender and the borrower. Bankers do not deny that they want to dig deeper into a businesses’ finances before making a loan than in years past.

“We would love to talk to (small businesses) who want to expand,” Sauer said. “Saying a banker is not interested in loaning money is like saying a bicycle store owner isn’t interested in selling bicycles.”

A national survey of small businesses this month by the National Federation of Independent Businesses found 91 percent of small business surveyed reported that their credit needs were met or that they were not interested in borrowing.

That turns the perception that there is a lack of available credit by banks on its head, said Tony Gagliardi, director of the NFIB in Colorado where there are 7,500 NFIB members.

“For a long time we have talked about access to capital — policy makers are beating the drum that the only way the economy is going to improve is to make sure capital is available to small businesses,” Gagliardi said. “(NFIB) has been saying access to capital is not the problem for small businesses — the biggest problem is there are too few people spending money on Main Street so small businesses are reluctant to expand.”

On the national level, Congress set aside $30 billion for the Small Business Lending Fund — which is meant to get capital into banks that have less than $10 billion in assets. Those banks, then, would turn around and lend the money to small businesses.

At the time the fund was created in 2010, the Treasury Department said small business owners faced a credit crisis, including difficulty accessing capital. But, to date, only about one third of the money in the Small Business Lending Fund has been requested.

In Colorado, it seems small businesses are interested in small, more manageable loans.

About half the $2.5 million set aside in the Colorado Credit Reserve program has been used, which is right on target, said Masouda Omar, Colorado Housing and Finance Authority manager of business finance. The credit program was revitalized in 2009 to create greater access to capital for small businesses in Colorado by using small amounts of public resources to encourage private bank financing.

Loan volume has doubled in the first half of 2011 over all of 2010, she said. The 355 loans, on average are $36,000 and can be used for anything from expansion to purchase of inventory. Colorado Springs businesses represent about 10 percent of the loans.

Central Bank & Trust in Colorado Springs, which is working with the Small Business Administration Loan Guarantee Program, is busy making small business loans, said Tony LeVeque, executive vice president and senior business development officer at Central Bank & Trust. Increasing small business loans is part of his bank’s business plan, he said. He expects to back between 20 and 30 SBA loans this year — likely to be the highest number in El Paso County.

SBA Loan Guarantee Program allows the bank to offer more advantageous terms, LeVeque said.

“We can do longer term loans, which lowers down payments,” he said.

The loan application process is more vigorous these days, said Randy Schillinger who co-owns Honest Accurate Auto Service with Dane Kane.

“There was a lot more to prove, a lot more to show,” Schillinger said of the 2010 SBA loan he took out with Central Bank & Trust compared to an SBA loan the auto shop took out in 1996.

But, there was no shortage of available credit, he said. The auto repair business has been good because in this economy people are not buying new cars, but rather keeping their old cars, Schillinger said. The business partners, who opened their first shop on north Nevada Avenue in 1993, borrowed $610,000 to open their second shop on Tutt Boulevard, which is 8,000 square feet and has eight bays.

“There were three banks that wanted our business,” Schillinger said.

Colorado Springs bankers said a good loan is still a good loan, meaning it fits the criteria of good credit, strong cash flow and good collateral. But, in this economic downturn, real estate values have declined, thereby lowering equity and some small businesses have dipped deep into their savings accounts, reducing their liquidity. That coupled with low sales volume puts some small businesses in the risky category.

In some cases, the business owners may need to meet with counselors at the Colorado Springs Small Business Development Center to take a hard look at the financials to develop a strategy to build a stronger cash flow position, said Director Marcella Hurley. There are lenders willing to look at the overall company, based on a sound plan and there are lenders willing to learn more about the SBA guarantee, she said.

It is best for small businesses interested in expanding or renovating to talk to their bankers, Sauer said. Banks are trying to come up with innovative ways to help borrowers.

“Perception alone won’t turn things around,” Sauer said. “Small businesses have to feel good about adding 10,000 square feet and know it will pay off.”