To Get a Business Loan, Know How the Bank Thinks
To hear some small-business owners talk, getting a loan remains all but impossible. And yet, many bankers claim that their small-business loan volume is up significantly. So, is the small-business credit crisis over or not?
At first blush, the evidence seems contradictory. On one hand, many national banks have drastically cut back small-business lending. In addition, Advanta, a major issuer of small-business credit cards, declared on May 12 that it was closing customer accounts to new charges.
On the other hand, the Federal Reserve’s April survey of lending practices showed credit conditions have loosened. The Small Business Administration says the weekly volume of loans to small businesses is up more than 25 percent since March. And community banks, those smallish, old-fashioned institutions that make up the vast majority of the country’s 8,300 banks, say that they are ready to take back customers from the national lenders.
Much of the confusion has its roots in contrasting banking strategies. Big national banks are much more likely to have been drawn into the morass of securitized loans, credit-default swaps and the like, which has forced them to preserve capital by curtailing lending.
The smaller banks, meanwhile, have traditionally made their livings off of loans that they carry on their own balance sheets to individuals and small businesses. For them, despite the economic crisis, the current situation is more or less business as usual.
Indeed, a May survey of 1,500 small businesses by Barlow Research Associates found that companies that applied to small banks for loans in the past year were three times as likely to get credit as those who applied to large banks.
Nick Sarillo, owner of two Chicago-area pizza restaurants called Nick’s Pizza & Pub, says he recently found himself on the wrong side of that divide when he sought to borrow $2.3 million to open a third location.
In late 2007, he was engaged in the loan review process with LaSalle Bank — historically a popular regional lender for Chicago-area small businesses — when LaSalle was acquired by Bank of America, the financial giant.
Bank of America told Mr. Sarillo it wanted 20 percent down, twice what LaSalle had been requesting. Then, he said, after two months of slow sales last year at his restaurant in Elgin, Bank of America doubled the required down-payment again, forcing him to postpone the deal.
Now, he said, he is shifting his business to the First Community Bank in Elgin. A spokeswoman for Bank of America said the bank does not comment on individual customers. But she said, “We continue to develop small business relationships and are committed to the small business customer and space.”
Bankers say that some of the confusion in the marketplace has been caused by ill-founded complaints by small-business owners. Consider that most small companies are not looking for loans: the Barlow survey found that 70 percent of small businesses had not applied for any credit in the past year. That, said Bob Seiwert, head of the American Banker Association’s Center for Commercial Lending and Business Banking, is because fewer businesses see opportunities to grow in a down economy — and the businesses that do come looking for loans tend to be financially vulnerable and thus most likely to be turned down for sound banking reasons.
“The fact is, a lot of borrowers just aren’t creditworthy,” said Sherrill Stockton, senior vice president of Sonoma Bank, which is part of Sterling Savings Bank in Spokane, Wash. “But it’s human nature, if you get turned down, to go around saying that there are no loans available.”
Bankers say that small-business owners looking for a loan should start by knowing which business measures — debt-to-equity ratio, for example, or net margins — lenders focus on when evaluating loan applications in their industry. Bankers say would-be borrowers should demonstrate exactly how they plan to use the money and why the plan makes sense.
This month, for instance, Chandan Patel borrowed $3.7 million from Sonoma Bank to buy her second hotel property, a Comfort Suites hotel in Castro Valley, Calif. She said she had demonstrated to her banker that she would be able to increase the property’s average daily rate, a critical yardstick in the hotel industry, by raising room prices while improving customer service and adding amenities. It helped that she was able to point to a track record of maintaining an unusually high daily rate at her other property.
Both bankers and borrowers say the human side of lending requires as much attention as the technical aspects. Small-business owners should cultivate a relationship with a local banker — ideally, long before they need a loan — and treat that relationship as a long-term partnership.
Bob Davis, chief executive of Virtual Driver Interactive, which makes driving simulators, benefited from a personal banking relationship when he was looking to buy his California business from his former employer late last year in the early days of the financial crisis. For tax reasons, the deal had to happen in just 90 days, or it would not happen at all. And because the business had been part of a larger operation, its financial performance was difficult to demonstrate. “It wasn’t an easy sell,” Mr. Davis said.
He happened to meet Greg Patton, the chief executive of Sierra Vista Bank in Folsom, Calif., at a local golf course, and Mr. Patton invited him to spend a couple of hours talking about the business. “No numbers, no spreadsheets, let’s just talk,” Mr. Patton told him.
After the talk, Mr. Patton became an advocate for the deal, Mr. Davis said. He asked for a set of financials and a two-year projection for the business. More important, though, he coached Mr. Davis through the loan review process. More than once during the process, issues came up that could have scuttled the deal. Each time, Mr. Davis says, huddled with his bankers and found a solution. The $900,000 loan went through in February, just ahead of the deadline.
Still, business loan applicants should expect to be closely scrutinized, especially by smaller community banks that have generally eschewed the formula-based lending practices many national banks adopted in recent years.
But Ranjit Kushwaha, who recently borrowed in the high six figures to buy the building in Monterey, Calif., that houses his Indian Summer Restaurant, was glad to see his bank being careful. “They made me jump through all kinds of hoops,” he said. “They’re very cautious — but that’s good. Otherwise, we’d all end up with the same problems again.”
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