By Paul Davidson, USA TODAY
Some small businesses say they’re finding it easier to get loans, a development that could help jump-start a tepid recovery and sluggish job market.
Small firms with fewer than 100 workers employ half the labor force and typically account for two-thirds of jobs created in a recovery. So far, though, they’ve benefited far less from the upswing that began in mid-2009 than larger firms. That’s because they generally haven’t taken part in the export surge, and they rely on banks rather than corporate bond markets to borrow money.
Many small businesses still complain credit is tight. But in a survey released this month by the National Federation of Independent Business (NFIB), the portion saying loans were harder to get than three months earlier was the lowest since September 2008. And senior loan officers surveyed by the Federal Reserve said their standards for small-business loans eased for the second-straight quarter in the three months ending Sept. 30.
“This looks to us like the start of a serious improvement,” says Chief Economist Ian Shepherdson of High Frequency Economics.
Kevin McKee owns four day care centers in the Jackson, Miss., area, but couldn’t get a loan to open a fifth even though he’s been profitable through the recession and diligently repays his existing debt each month.
Recently, Community Bank approved his request for a $1 million loan to open the new facility, which will serve about 125 toddlers and employ 15 to 20.
“It’s a small victory to know that other people have the … confidence in you,” McKee says.
Will Smithhart, the loan officer who handled McKee’s application, says it likely would have been far more difficult to clear it earlier this year. “There was a period of time when everything got locked up because of the unknown,” he says. “I do sense a degree of stability out there.”
Employers added 151,000 jobs in October, the most in five months, although the jobless rate was unchanged at 9.6%. Retail sales have beaten estimates, and the Commerce Department this week raised its estimate of third-quarter economic growth to an annual rate of 2.5% from 2%. That’s still lackluster, but at least the economic picture is brightening.
On Wednesday, the Labor Department said jobless claims last week fell to 407,000, down 34,000 from the previous week, the lowest since July 2008. Shepherdson says the report could indicate that “the small firms sector, which has been keeping claims high, is improving.”
Financial institutions are on stronger financial footing, with more capital and fewer bad loans. The amount of loans that banks charged off in the third quarter fell vs. a year ago for the second-straight quarter after rising steadily since late 2006, the Federal Deposit Insurance Corp. said this week.
“Banks have worked through a lot of their problems,” says Paul Merski, chief economist of the Independent Community Bankers of America (ICBA). “The industry is in a better position to increase lending.”
Furthermore, interest rates are so low that banks can scarcely make a profit by investing depositors’ money in Treasury bonds. “Eventually, for banks to become profitable, you have to start taking on some risk,” Merski says.
Commercial and industrial loans by small banks, which largely serve small firms, grew at a 4.1% annual rate in October, the most since 2008, according to a UBS analysis of Fed data.
More room for improvement
Even so, most lenders are still tight-fisted. Credit conditions aren’t nearly as favorable as they were before the 2008 financial crisis.
Sal Marranca, president of Cattaraugus County Bank in Little Valley, N.Y., and ICBA’s incoming chairman, says regulators continue to pressure banks to impose tougher lending standards following the financial crisis.
Jim MacPhee, CEO of Kalamazoo County State Bank in Schoolcraft, Mich., says many laid-off workers have tried to start their own businesses. “Loans are a great option if we can get (applicants) qualified,” he says. “The problem is, 90% walk in the door and they don’t have any money to put in at all.”
Meanwhile, most small businesses aren’t trying to borrow, as they have yet to see a robust pickup in sales, says NFIB Chief Economist William Dunkelberg.
“Demand is a bigger issue than borrowing,” says Roger Harris, president of Padgett Business Services, a small-business consultant.
Still, even a gradual improvement in banks’ willingness to lend could fuel small-business expansions as demand grows. When the economy is shaky, lenders may require a borrower to put up more collateral or boast a higher credit score.
Rockland Trust in Massachusetts is lending more to home builders this year and is even funding speculative construction. “We have more confidence,” says Executive Vice President Gerard Nadeau. Home “prices aren’t collapsing.”
Changing ‘no’ to ‘yes’
Among the beneficiaries of more favorable conditions:
•Chris de Boisblanc, co-owner of The Document Group, a Houston printing and copying service, couldn’t get bank approval early this year to lease eight scanning machines for $2,000 a month without putting up personal assets such as his home as collateral. This despite the fact that he continued to turn a profit in the slump and was already paying about $18,000 a month to lease 32 other machines. He dropped his plans.
But recently, Chase bank approved the leases, and de Boisblanc plans to hire four workers to run the machines.
•St. Joseph Equipment, which sells farm gear in La Crosse, Wis., couldn’t get loans for the full value of used tractors and other equipment it got as trade-ins. The loans supply cash until the goods are sold. Several months ago, Wells Fargo started providing financing for close to full value and cut the interest rate St. Joseph pays on its credit line to 3% from 4.5%. The moves gave the company up to $100,000 in extra cash per month, letting it rehire two workers it laid off last year. “We’re feeling a lot more comfortable,” says co-owner Sherry Wuebben.
•Newtek Business Services, the second-largest non-bank provider of loans backed by the Small Business Administration, expects to lend $70 million to small firms this year, up from $25 million in 2009. CEO Barry Sloane cites banks’ greater interest in providing financing to Newtek. Nationwide, SBA backed $22 billion in loans for small-business start-ups and expansions in the year ending Sept. 30, up from $17 billion the previous year. “The worst is over, and more money is being pushed into the market,” Sloane says.
Despite the brighter outlook, many small businesses still struggle to get credit. Ami Kassar, CEO of MultiFunding, a small-business loan adviser, points to the sharp drop in commercial real estate values that typically serve as collateral. He says credit conditions are easing slightly, but only for enterprises that have sufficient collateral.
Dynamic Sales of St. Louis, which sells industrial and construction supplies, has been unable to double its $75,000 credit line this year so it can launch new product lines, says President Jim Henderson.
But noting Dynamic has been paring its debt, a bank official recently told him “he wants to look at it again in January,” Henderson says. “We’re in a down cycle, but it’s going to come back. My view is you have to prepare for it.”
http://www.usatoday.com/money/smallbusiness/2010-11-26-hiring26_CV_N.htm