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Small Biz Outlook Brighter in the Heartland

Friday, 14 May 2010 | 9:58 AM ET

When you live in California, as I do, it's easy to feel gloomy about the outlook for small businesses. I've blogged about it before. It's hard for the little guy to get by. Banks are loath to loan.

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In the middle of the country, however, it's not so bad.

"A bit better," is how Ron Barnes describes the small business economy in St. Louis. Barnes is Chairman of Midwest BankCentre, a community bank, where he says loan approvals in the first quarter rose 300 percent from a year ago.

Still, Barnes would like to lend even more, but "we can't find enough good opportunities."

Congress talks about banks not lending to small businesses, but Barnes explains there are three types of companies he sees.

The first is made up of small businesses which lacked liquidity or capital, and when the recession hit, "They had no staying power."

Barnes says these businesses desperately need loans to stay afloat. "I'm not sure the banks should be making that loan."

The second group is at the other end of the spectrum, small businesses with strong balance sheets going into the recession. When sales dropped, they could afford to hunker down and wait for times to get better. "They're just sitting on cash," says Barnes. "We would love to lend them money...they don't want any money."

Sounds a bit like Goldilocks and the Three Bears. One group is too hot, the other too cold.

The third group, however, is not "just right". Barnes says this group is made up of businesses with strong balance sheets, but revenues and profits fell so much they're really struggling. "They may not be able to cash flow debt." These small businesses want loans, and banks would often like to lend to them because there's good collateral. But Barnes says banks would be forced to classify such loans as substandard, which could create pressure from regulators and hurt the bank in other ways (like forcing it to pay higher FDIC premiums). "No bank in the country wants that."

That said, Barnes does see improvement. He believes small businesses are a lagging indicator to large corporations, because most small businesses serve big business. Only when the big guys turn around—which he says they're starting to do—will the outlook improve significantly for the little guy.

And speaking of the little guy...for one, 2010 is looking very good.

"I get asked about 20 times a day, 'How are you handling the recession?'" That's what Joe Genovese told me over the phone. He runs Genovese Jewelers, which sits on a busy road outside St. Louis. "Seventy-five thousand cars go by every day."

How's 2010? "We just had the best first quarter ever in the 30-year history of the company," he says. One year ago, things were not so good. "I stopped saying to customers, 'How are things going?' because I was afraid they'd jump off the roof." Some of his competitors went under. "I hated to see them struggle...but I've gained their customers."

Genovese says business started to turn around in April of 2009. He believes one reason improvement came earlier to St. Louis is that the Midwest never went through the astonishing housing boom seen on the coasts, so the bust wasn't as bad either. Still, profits aren't what they used to be. Genovese says his gross margins are down to around 33 percent, compared to the industry average of 55 percent. As for getting loans, Genovese says, "I don't go to the bank. I retain cash and work out terms with vendors."

The best news is that people are still getting engaged. They are taking longer to buy a ring, though not as long as they did last year. In 2009, "A young man looking for a ring —instead of shopping one to two places, he'd shop 20," Genovese tells me. What about now? "He's still shopping at least ten places."

Of course, there are fewer places left to shop.

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  • Based in Los Angeles, Jane Wells is a CNBC business news reporter and also writes the Funny Business blog for CNBC.com.

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