It’s true that small business lending has declined since the 2008 financial meltdown, but the most revealing reasons behind the trend are complex.
Multiple factors have kept small businesses in a holding pattern, afraid to make any sudden changes. It’s the sluggish economy, the looming presidential election and rancorous political climate and the more stringent lending standards of banks that have left small business owners and bankers still working through their post-recession relationships.
Small businesses blamed banks. Banks came back and said, it wasn’t them, the demand just wasn’t there.
The back-and-forth caused business loans under $1 million to fall 13 percent from 2007 to 2011, according to the Federal Deposit Insurance Corp.
And while Small Business Administration-backed lending and programs have seen a surge in loans in 2012, the overall attitude of small business owners is wait and see. A recent national survey of small business owners said more than 80 percent did not even seek a loan in 2012.
“I think most small businesses are pretty cautious about expanding, buying new buildings, hiring people, whatever they might need,” said Lonnie Parsons, ANB Bank regional president. “They just don’t want to get themselves in deeper with demands on cash flow right now.”
Instead, small-business owners have downsized, tightened the belt, sold off surplus assets and tried to pay off debt. Further, they are not seeking traditional bank loans and instead are using revenue to pay as they go for capital needs and expansions.
It might seem like the standards for small-business lending have changed since 2008, said Jesse Spaeth, Cañon National Bank market president. They really haven’t, he said. What has changed is wiggle room to make exceptions to loan policies.
“If something didn’t fit within the loan policy, bankers were willing to look at mitigating factors because the economy was much better,” Spaeth said.
Now, not so much, he said.
“Our bank is at this point where we are looking to make loans,” he said. “But, those bars that are set are still pretty strict. Exceptions still aren’t being made.”
It means small businesses must come on strong when they meet their banker, Spaeth said. They must be prepared to show the bottom-line numbers and tell their story, he said.
“There is only so long they can hunker down,” he said. “They need to grow and make investments.”
Now may be the right time. Interest rates are low. Real estate values are down. Banks are ready to make loans and approve lines of credit.
“There is definitely a favorable climate for borrowing money for your business,” Parsons said. “Interest rates are very low right now. It’s a good time for a small business to take a look at restructuring debt and looking at locking in some long-term interest rates for buildings or equipment.”
But, small-business owners must be prepared to show how an expansion or new equipment will pump up their bottom line.
“They have to have a business plan,” Spaeth said. “It doesn’t have to be a 100-page document. It just has to be well-translated to me. I have to understand their story.”
It’s less about checking a box of requirements and more convincing the banker that you know how the business expansion translates to economic activity.
“There are so many aspects to the deal,” Spaeth said. “That’s when having a good relationship with the bank helps — if they understand the story and understand what the (small-business owner) is doing, it goes a long way.”
Maureen Christopher and Marty Taylor, owners of Tayco Screen Printing & Embroidery, said they are worried about the election, increasing government regulations and the economy’s continued flat line.
“It really inhibits you of being able to think about moving forward,” Christopher said.
But the business partners see a move to more prominent downtown location increasing the bottom line. It’s risky, but they were able to tell their business story to Cañon National Bank. They’ve been in business for 34 years. They have 10,000 square feet of space now but feel they are tucked away with little street presence.
“We have increased in business during the recession, which is part of the reason we wanted to do the move,” Christopher said. “When the economy goes south, people want to do business with someone they know will be there.”
The Tayco partners were approved for a loan of just more than $1 million and have purchased a 12,000-square-foot building at 117 S. Nevada Ave. At their new location, they can open a retail store to complement their wholesale business, Christopher said. And they anticipate hiring more employees.
“We are hidden at our location,” she said. “This move is going to be huge. We are going to be known. We are pretty jazzed.”
Borrowers understand the new reality, Spaeth said, and they are willing to discuss every aspect of their business. The loan application process could take one week, or it could take months, he said.
“They are happy to talk about it, answer questions and, for many, several rounds of questions,” he said.
The SBA’s loan programs posted their second-largest dollar volume in fiscal year 2012 — supporting about $30 billion in loans to small businesses. The upswing was driven by the Certified Development Company loan program, boosted by the temporary refinancing program. SBA Administrator Karen Mills said the strong numbers are a clear sign that businesses are regaining confidence.
In Colorado, SBA-backed loans were down from 2011 when 1,412 SBA-backed loans were approved. In fiscal year 2012, that number was 1,293 loans for $558 million; of those, 965 loans were approved for existing businesses and 327 were approved for new businesses.
For an SBA-backed loan, a small business is not required to have as much equity and could mean less money for a down payment.
“The bank really is using a government-guarantee in replace of it,” Spaeth said.
As for traditional bank loans, Spaeth does not see bankers going back to the old ways of making exceptions to the loan programs’ standards and letting small business wiggle their way to a loan.
“It’s still very tough,” Spaeth said. “It’s going to continue to be tough. Many people will continue to be frustrated with banks.”
Low interest rates are enticing to the borrower, but it means thin margins for banks. If a loan goes bad, banks have to make 20 times that loan again to recoup losses, he said.
“Because of that we have to be careful or we will be out of business,” Spaeth said. “At the end of the day, most banks are historical cash-flow lenders. We want to see that based on performance, you can repay the loan.”
37 percent of small-business owners expect credit to be very or somewhat difficult to obtain;
39 percent of business owners who say they plan to make a capital investment during the next 12 months are planning to pay for it using credit;
31 percent plan to use their savings.
Source: Wells Fargo/Gallup Small Business Index