If lenders are giving business borrowers the cold shoulder, Renee Wood, founder of The Comfort Company, hasn't felt the chill. When Wood, 43, needed a loan to purchase a new $180,000 warehouse for her growing business, an online boutique that specializes in sympathy and memorial gifts, all she had to do was walk into her local bank and ask for one. After showing solid financials, not only was her loan approved, but also the bank suggested a $50,000 line of credit. It didn't hurt that Wood had banked with Harris Bank for 10 years and also holds her commercial accounts there. "They know my business, and they know me," she says. "They could just look at the business checking account and see the growth trends." Her Geneva, Illinois, business projects sales of about $820,000 this year.
For businesses with strong financials, community banks have plenty of money to lend—and they are aggressively courting small businesses. But thanks to increased regulatory scrutiny, all banks—even those that had no part in the subprime mortgage mess—are being forced to tighten their lending standards and are therefore narrowing the range of acceptable borrowers, says Paul Merski, chief economist and director of federal tax policy for Independent Community Bankers of America. "That's going to make it a little more difficult for entrepreneurs to get the capital they need," he says. The housing market slump hasn't helped either, since roughly half of all loans made in the small-business arena are collateralized by some kind of personal or commercial real estate; as the value of that real estate declines, the amount that borrowers qualify for shrinks as well. Because of that and the continuing economic downturn, businesses that seemed like a good risk last year might have more trouble proving their creditworthiness today.
That's why community bankers are clamoring for more support for the SBA's government-guaranteed loan program, which gives lenders more leeway with credit terms. "It's a tool to be able to give your customer access to capital under extended terms that fit their business model," says Cynthia L. Blankenship, chair of ICBA. For example, regulators don't like banks to extend their terms on conventional loans to accommodate small-business cash-flow issues, but SBA loans can go much further out—for as many as 25 years.
"You would think in a time of economic downturn that a loan program like the SBA's, which is specifically designed for borrowers whose loans can't be underwritten in the conventional sense, would be expanding," says David G. Schroeder, CEO and president of American Enterprise Bank. "Quite the contrary is actually happening in the market now." The SBA's flagship 7(a) program has declined sharply this year, with the number of loans down 21.8 percent and dollar amounts down 8.8 percent. Blankenship and other community bankers blame that decline in part on the higher fees—ranging from a couple of thousand dollars to $50,000—imposed when Congress voted to eliminate the program's federal subsidy in 2004.
The newly levied lender oversight fees have not helped, says Tony Wilkinson, CEO of the National Association of Government Guaranteed Lenders. "We're hearing lenders say, 'That's the straw that's breaking the camel's back—we're done.'"
The SBA contends that the reduced number of lenders in the program is largely the result of bank mergers. The decline in loan guarantee volume, says the SBA's Mike Stamler, is owed to "lower demand for capital and a tightening of credit standards by some lenders."
NAGGL and ICBA have asked Congress to shore up the program by suspending lender oversight fees and increasing the maximum loan size and maximum guarantee—among other things. Sen. John Kerry (D-MA) has introduced a few bills addressing the issue, one of which includes a $150 million appropriation to temporarily lower fees. But Wilkinson isn't expecting much movement on the Hill.
Regardless, community banks may still represent an entrepreneur's best chances of being funded, particularly if entrepreneurs already have a close, friendly relationship with them. "Yes, there is tightness in the overall credit market and a slowdown of the macroeconomy," says Merski. "But if you have a good business plan and you've already been working with your community bank, there's money to be had."