Banks tighten lending standards for business loans

By Brian Bandell
updated 7:00 p.m. ET Feb. 17, 2008

The mortgage credit crunch has spilled over into business lending as local banks are less risk-inclined than they used to be and credit is harder to come by for businesses, U.S. Small Business Administration officials said.

Francisco "Pancho" Marrero, director of the Small Business Administration's southern Florida district, notes the number of SBA-backed loans from banks has trended down in his district as banks toughen their standards and small businesses are more cautious about expansion.

A January survey of senior loan officers by the Federal Reserve found that one-third of U.S. banks had tightened their lending standards for commercial and industrial loans during the fourth quarter. This means higher costs of credit lines and premiums charged on risky loans.

"The hit that lenders have taken in the mortgage side and the substantial losses they experienced has led them to tighten credit in other areas," Marrero said. "Loans to small businesses have been adversely affected."

Banks have cash and the enticement of a low Federal Reserve rate, but they're nervous about lending, said Kenneth Thomas, a Miami-based banking analyst. Businesses can still get loans, but banks will ask for tougher terms, such as greater down payments and more collateral besides inventory.

Banks will request more documentation of company finances and put more scrutiny on credit reports, Thomas said.

"This could make it harder to buy property or other businesses," he said. "The credit crunch makes the economic slowdown worse."

The loss of home equity is compounding the problem. During the years of rising real estate values, many small business owners tapped their home equity for collateral and additional lines of credit, but that's harder to do now, said Andrew Cagnetta, president and CEO of Fort Lauderdale-based Transworld Business Brokers. This can reduce the amount of loans because of loan-to-value ratios.

Cagnetta said the lowering of the Federal Reserve rate has eased the problem by reducing debt service so loans remain obtainable.
Banks shy away from construction

Some businesses will have more hoops to jump through if they want a loan. Any company tied to the real estate industry will be looked at extra carefully, said George Bermudez, executive VP of corporate lending at Doral-based U.S. Century Bank. For example, they'll make sure a building material supplier has projects lined up and that those projects are financially feasible, he said.

U.S. Century's terms for real estate-related companies will also be more conservative. The bank could lower its loan advance rate as a percentage of inventory or receivables, Bermudez said. It might also shorten the terms.

"It makes any bank in town a little nervous that longstanding companies in South Florida are going out of business," he said.

While U.S. Century hasn't taken similar measures with other industries, it requires most privately owned companies to have their owners personally guarantee the loan, and it doesn't lend to businesses less than three years old.

Banks have always valued experience in small business lending, but they're looking harder at it now, said Gary Cole, a certified business analyst at Florida Atlantic University's Small Business Development Center. He helps entrepreneurs obtain SBA loans.

In prior years, banks might have made loans to people without much experience because they had good collateral, but that doesn't cut it anymore, Cole said. Now, banks want experience, a well-researched business plan and a near-flawless credit score.

"There seems to be a real issue in trying to find money for small businesses in the marketplace today," said Bill Diggs, president of the Miami-Dade Chamber of Commerce. He knows several minority-owned small businesses that have existed for years, but aren't getting good receptions from banks. Often, they don't have well-documented audits or financial projections because these are either too expensive or take too much time.

"You've got to do it because you need the money, but when can you do it?" Diggs said. "For these small businesses, it's a lot to ask."
Tips for seeking small business loans

* Research the industry, the local market and your competition.
* Do financial projections, including cost of inventory, expenses and expected revenue.
* If you don't have experience in the industry, get an experienced partner or manager, or get a job in that industry first.
* Pull your credit report and credit score. Clean up any problems or make a statement on the report explaining them.