Banks increase lending, but also heighten loan requirements

Want one more sign that we’re crawling out of the recession?

This year, the number of companies receiving SBA loans has risen 30 percent, according to the U.S. Small Business Administration, signaling that banks are lending a bit more freely than they were in the height of the credit crunch. 

Financial experts and companies in the fitness and outdoor industries told SNEWS® that conditions have improved for those seeking loans, though, banks have made the process of getting a loan more rigorous.

“Lending has loosened a little,” said Kira Riedel of the finance and accounting firm CFO Services (www.cfoservicesnow.com), which works with businesses in the outdoor industry. Riedel said that banks have finally adjusted to the dampened economy and have worked out their internal lending policies to limit their risk. “Their policies will certainly be more open, but will be tighter than they were before the recession,” Riedel told SNEWS.

While banks are not quite as tight-fisted as they were a year ago, loans are also easier to get thanks to actions by the federal government. The Recovery Act of 2009 increased the amount of money that the federal government would reimburse to banks if a borrower defaults on an SBA loan. The government used to guarantee 75 percent of the loan, but now it guarantees 90 percent.

(Click here to read the Feb. 23, 2009, SNEWS story, “Small business loans get boost with new federal stimulus bill.”)

Don Bushey, owner of Wilderness Exchange Unlimited (www.wildernessexchangeunlimited.com), a 10-year-old outdoor specialty store in Denver, said that Great Western Bank was more willing to lend him money once the government increased the SBA loan reimbursement to 90 percent. Bushey was able to get an SBA loan for $150,000 in late 2009, which he used to double the size of his store and expand his inventory. “Our bank was great to work with, and their SBA loan specialist was very helpful in guiding me through it,” said Bushey.

The lending climate is also looking better for Elliptigo (www.elliptigo.com), a 5-year-old company that manufactures a bike with a pedaling motion similar to that of an elliptical machine. 

“It’s definitely gotten better in the last six to nine months,” said Bryan Pate, co-founder and co-president of Elliptigo, who is seeking $1 million to $3 million to expand his inventory as the company moves more toward a retail sales model. “We sat down with the SBA loan officer at our bank four months ago, and he said lending conditions were continuing to get better.”

Pate said that when he first inquired about a loan during the height of the credit crunch, his bank required businesses seeking SBA loans to show a year’s worth of revenue. Just six months later, the requirement got tougher and the bank wanted to see revenue for two years. Pate said that by the end of 2009, the bank demanded to see profits for two years. Fortunately, the bank has finally relaxed the requirements.

“At the end of the first quarter in 2010, they backed off and said profits for a year. And now it’s down to revenues for a year,” said Pate.

New hoops to jump through

While banks are making it a bit easier to get an SBA loan, it’s still a difficult process, said Bushey. For one thing, the great amount of paperwork and time spent with the bank monopolized his time.

“I had to kind of leave my business for a month and just focus on that,” said Bushey, noting that it was much more difficult than when he secured an SBA loan in 2004. He said the 2004 deal was based more or less on his relationship with the bank. “This time, at the end of the day, it came down to sheer numbers and whether the business plan made sense,” he said.

Bushey said one difficult aspect was that the bank scrutinized the financial records of Wilderness Exchange Unlimited more than in 2004. “My point-of-sale system provides real-time inventory, and when I asked if I could turn over an abbreviated version of the report, they said they wanted every item and every SKU,” he said. “I gave them a 350-page inventory report.”

The right approach

Riedel of CFO Services said the owner of a small business should keep in mind that loans are based much more on numbers now, rather than personal dealings between the bank and the business owner. “It used to come down to relationships more than it does now,” she said. “I don’t see hardly anything getting done based purely on relationships.”

In fact, Riedel cautions that business owners shouldn’t emphasize any personal relationship when they first approach their bank for a loan. “Going for that really nice, down-to-earth relationship upfront is not really the best idea,” she said. Rather, the business owner — or a financial expert representing the business — should go to the bank with all of the company’s financial records in order and appear confident and knowledgeable.

“You need to provide them with your forecast and your budget, your income statement and balance sheet, and know what those things are,” said Riedel. “You need to be able to speak in those accounting terms or you might undermine your competence about running your business.”

Riedel said people seeking loans should also realize that the terms are not quite as good as they used to be. Banks are not only requiring that businesses have more collateral than they have in the past 15 years, but they have also changed the value they put on a company’s collateral.

“They used to lend you 65 percent of the value of your inventory, and now it might be 35 percent or 50 percent,” she said. “And the outdoor industry is particularly challenged because banks don’t want to face the risk of having to liquidate screen-printed T-shirts and backpacking gear. It’s harder for them to wrap their mind around your inventory.”

While the loan deals aren’t as sweet these days, the money is at least a little easier to come by, and Riedel said lending should continue to loosen over the next few years. 

“It will be more loose because banks have to lend to stay in business,” she said.

And banks realize that small businesses are the lifeblood of their local economy. Just ask Bushey, whose loan not only pumped money into Wilderness Exchange Unlimited, but also put money in the pockets of locals.

“I employed out-of-work contractors, and I hired two more full-time employees as a result of the move,” he said. “The economic stimulus did exactly what it was supposed to do.”

–Marcus Woolf