Some Players Still Sidelined in Lending Game

By Emily Maltby – November 4, 2010

Banks have slowly begun to increase their lending to small companies. But generally, only the strongest of firms – those that tend to be larger, with cash and collateral on hand – are receiving loans and lines of credit.

Many of the top small-business banks issued more new loans to small companies in the third quarter. Wells Fargo & Co., for instance, issued $3.9 billion, up from $3.3 billion in the same quarter last year. Bank of AmericaCorp. extended $5.7 billion to small firms, up from $4.1 billion last year, while J.P. Morgan Chase Co. lent $2.7 billion in its last quarter, up 42% from $1.9 billion.

However, much of the money is going to the “big” small businesses, banks say.

“The larger the business, the better they are doing,” says Kathie Sowa, who handles small-business credit at Bank of America, which last month announced plans to hire 1,000 bankers to work with small-business clients.

Meanwhile, the smallest companies—those with less than $1 million in annual revenue—”are not recovering at the same pace,” she says.

In the first six months of 2010, small businesses that reported the greatest success in winning financing had positive revenue growth, a five-year track record or had used 2008 profits to finance themselves during the credit crunch, according to a survey released last month by the Federal Reserve Bank of New York.

Banks also say they’re paying more attention to the health of a company’s industry.

Regions Financial Inc., for example, is lending primarily to professional practices such as physicians, veterinarians, and accountinglaw and engineering firms, which don’t depend on discretionary consumer spending. The bank has become “aggressive” in “fishing where the fish are,” according to John Asbury, head of business services at Regions in Birmingham, Ala.

That’s placed companies like Efficient Lighting Corp., a Buena Park, Calif., maker of energy-efficient light bulbs and light fixtures, in a sweet spot when it comes to securing credit. The four-year-old company, which powered through the recession thanks to tax incentives and government subsidies directed toward the green industry, expects annual revenue of $4 million this year.

Efficient Lighting secured a $500,000 credit line in March and an SBA-guaranteed real-estate loan for a $3.4 million industrial building in August from Bank of America.

“You need money to grow,” says Vu Thai, the company’s president. “When I got the line, I could increase inventory. And I could bridge time between client payments.”

On the other end, Shane Ramsey, president of seven Schlotzsky’s restaurants in Oklahoma, says he was denied financing by five national and regional banks as he tried to open an eighth franchise in Tulsa.

Mr. Ramsey says banks are being too picky about borrowers’ revenue and industry. While his combined revenue is about $8 million, each of his restaurants generate only around $1.2 million. And size wasn’t the only deterrent, he says. “When we pressed them for a reason, their only excuse was, ‘We’re not lending to the restaurant industry.'”

A few months ago, Mr. Ramsey stopped trying to woo the banks and instead found private investors to help with the start-up costs. He anticipates the restaurant will open in January.

Banks say they are simply being cautious, as finding credit-worthy borrowers —no matter a company’s size or industry—is still a challenge. According to the Federal Reserve data, demand remains strong—59% of business owners tried to get financing in the first half of the year—but applicant quality has weakened.

Marc Bernstein, who heads the small-business division at Wells Fargo, says that the broadest problem in trying to extend credit is that business owners are still trying to pay off debt they accrued prior to the recession.

“I don’t want to hear anybody tell me banks don’t want to make small-business loans,” he says.

“We are really stretching as far as we can prudently stretch to approve as many as we can. We have an obligation to make sure they are repaid.”

Banks say they’re not ignoring the smallest businesses. At Bank of America, Ms. Sowa says the new bankers will be actively recruiting the smallest of businesses—not necessarily to extend credit, but instead to process their deposits and help manage their cash flow. That way, when they become ready for a loan or line of credit, the banking relationship will already be well-established, she says.

Source: The Wall Street Journal

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