Still No Boom in Small Business Lending

Dan Mitchell has borrowed $3 million in the last year and a half to buy real estate and equipment to expand his brewery, Ithaca Beer Co.

It wasn't easy.

Mitchell went to at least four banks in his city of Ithaca, N.Y., looking for a loan. His sales were growing 25 percent a year and the company had become profitable. His distributors wanted to buy more beer from him.

But most of the loan officers just handed him applications, told him to fill them out and to send the papers in. Even a bank that had already loaned Mitchell money wasn't interested. He says he still doesn't know why his own bank turned him down.

"The craft (beer) industryis really strong and our sales were strong because of it," he says, still mystified by the cold reception he kept getting.

Mitchell's experience isn't uncommon. Banks remain hesitant to lend, and when they do, they're asking for more information and toughening requirements. It's a trend that is stalling the pace of lending to smaller companies.

PayNet, a company that analyzes commercial loans has an index that tracks loan applications by small businesses. The index peaked in the fourth quarter of 2008 at 115 as the financial crisis hit and then dropped to 75 by the first quarter of 2010. Since then, it has fluctuated between 70 and 75.

But Mitchell's experience proves that there is some lending going on. He finally got the loans he wanted from M&T Bank. He met with several bank officials including the regional manager.

"They wanted to get the deal done," he says.

Stringent Requirements

Before the recession, companies of all sizes were able to get loans like lines of credit, says Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp., a service that evaluates the creditworthiness of businesses. These days, the most successful borrowers are ones that are almost medium-sized, he says. Generally, according to the Small Business Administration, a small business has fewer than 500 employees.

When banks do grant loans, the requirements are tougher. Often the company has to meet higher revenue and profit levels to get loans — and to avoid paying them back early. Surviving the recession isn't going to score extra points with bankers, he says.

"They need to be making money, have sizeable revenue, longevity — they have to have survived a handful of recessions, not just one," Stibel says.

Someone hoping to buy a well-established franchise also will find it hard to borrow, Stibel says. People looking to borrow funds for a franchise need to show a record of success as a business owner or guarantee that they'll repay a loan out of their personal funds.

Generous Terms

Even though it's harder to get a loan, successful applicants may find that some of the terms are more relaxed.

Loans are averaging 56 months in length, up from the low 50s during the recession, says William Phelan, president of PayNet. Borrowers are also benefiting from low interest rates as the Federal Reserve keeps its benchmark interest rate close to zero.

Still, would-be borrowers aren't lining up at the door. Many remain skittish after the recession and are uncertain about the economic recovery. According to The Hartford's Small Business Pulse study, only 20 percent of the small business owners it surveyed feel "very optimistic" about the economy.

"You just don't see demand," Phelan says.

However, there are some lending bright spots. Agricultural businesses and the companies that serve them are more likely to get loans because their business is seen as more recession-proof, Phelan says. Transportation and construction companies aren't attractive to bankers because they were among the hardest hit in the recession.

Some Success

There probably isn't a sure-fire formula you can follow to get a loan. But owners who have taken out loans recently were successful because they had built a relationship with bankers over time or they put together an application package that went well beyond the basics that a bank requires.

"You don't just ready, fire, borrow," says Kathryn Petty, who has gotten three loans totaling $300,000 in the last year from her long-time community banker and from a national bank. "You need to be ready and you need to communicate (with bank officers) along the way."

Petty, president of White Lion Tea, a manufacturer and retailer of teas in Scottsdale, Ariz., says the long-term relationship she had with her local bank made the process easier. But she also believes she was able to get loans because she had prepared a cost-benefit analysis that told bankers what she would do with the money, how it would help her business and in turn, how it would help her pay them back.

One loan officer told her, "you've done all my homework."