Five years after the financial collapse, banks say they want to lend to business. But with tougher underwriting standards the rule, some small companies have given up on bank financing
While some area banks seem to have a substantial amount of capital to make commercial loans, according to banking analysts, some small businesses have found it difficult to obtain credit. But a check of those in the know, who have weighed both sides of the equation, provided some insight into this credit conundrum and seems to dispel the assumption that credit remains tight.
Jerry L. Clupper, executive director of the New Haven Manufacturers Association, an organization founded in 1913 that promotes and advocates causes important to the manufacturing community in greater New Haven and beyond, hasn’t heard any negative news from his membership on whether or not bank loans have become harder to obtain.
“I haven’t heard anything specifically,” says Clupper. “Nobody has approached me directly with that complaint.” Clupper adds that most manufacturers are more concerned right now about the government shutdown and its effects on moving their products through the pipeline to end users.
Anthony V. Rescigno, president of the Greater New Haven Chamber of Commerce, says that he hasn’t heard directly of any businesses that have had trouble obtaining loans, but the chamber has prepared for this issue and soon will unveil plans to help in this area.
“Starting October 15, we’re going to have an individual counselor at the chamber, sponsored by the Small Business Administration, who will work directly with small businesses every day of the week,” says Rescigno, who wasn’t at liberty to identify the person by name. “His only job will be to sit with people, interview them, figure out what their needs are and direct them to the right places. It’s another added plus here for our region.”
Rescigno adds that the chamber currently may provide resources in the area for new businesses that haven’t written a business plan or not yet established sufficient credit, but the new position will offer even more alternatives for loans to small businesses.
Data provided in a survey by the Connecticut Business & Industry Association (CBIA) shows that, while there is availability of loans for small businesses, a majority of companies surveyed are not seeking loans at this time.
“When we asked, ‘Is credit availability a problem for your company?’ 84 percent said no,” says Peter M. Gioia, vice president and economist for the CBIA. “That’s certainly much better than what we saw last year or two or three years ago. We’re finding that only a quarter of the firms at any given time are seeking financing. That’s because some of them aren’t expanding or some have other ways of getting money.”
“When we asked their opinion on how they would characterize the lending climate, five percent said excellent, 17 percent said good, so that’s roughly a quarter of those surveyed,” explains Gioia. “Half of them said average. Only three percent said poor and 23 percent said fair. I think there still are some glitches out there and part of it is that banks have returned to what would be normal underwriting standards. I think some of those standards got to be a little loose between 2005 and 2007. Now they’re back to tighter standards due to a lot more oversight because of Dodd-Frank and federal legislation. They certainly don’t want to write loans that might be bad.”
Gioia said that some companies are just now coming off of several extremely bad years stretching back to the economic meltdown of 2007.
“Some businesses probably don’t have great balance sheets,” notes Gioia. “If you don’t have that paperwork in order that shows your creditworthiness and a decent business plan — all those fundamentals that banks are supposed to ask for — they are asking for them now. If you don’t have all your ducks in a row, you may be getting turned down. I think that those who say they’re not getting the credit that they need have to go back to the basics in getting their paperwork together. They may need to do a bit more work in preparation and they may need to touch base with lenders who provide SBA [-backed] loans.”
Gioia adds that banks have money to lend but also are applying more rigorous oversight and newer regulations than they’re had in the past.
John S. Carusone, president of the Bank Analysis Center (BAC) in Hartford, which delivers management consulting and investment banking advice to executive management and directors of banks and thrifts, says Connecticut banks have money to lend to companies in need.
“Connecticut banks are in a position to lend money to qualified small-business borrowers,” says Carusone. “Banks have comparatively high capital levels and comparatively high liquidity. Many of them have restored the strength of their balance sheets by reducing their non-performing loans. The issue from a banking standpoint isn’t the ability to lend money for lack of the resource. It’s the qualifications of the borrower and the underwriting capability of the bank.”
Carusone says banks are being cautious because of the negative climate created over the past several years in the banking industry by government officials.
“They’ve been taken to the woodshed by banking regulators over the past several years,” says Carusone. “Even though they’re hungry for new loans, they’re very selective about borrowers to avoid being criticized by regulators.”
Carusone says that the BAC hasn’t heard directly about any small businesses that have not been able to obtain loans, due to the fact that his organization is closer to the banks than to their customers.
“We hear complaints, from time to time, says Carusone. “Anecdotal information suggests that the banks are a little strict. They are trying to satisfy two masters: one is their own portfolio and the other is to not be criticized by the regulatory community for being too lenient on their lending standards.”
Carusone says funding availability remains strong — at least as good as it has been since the crash of 2007-08.
“The issue has been, heretofore, a reduced demand because of a soft economy,” says Carusone. “But as the economy has rebounded, the demand is there but the credit qualification standards are inordinately high.”
In analyzing the data provided in the CBIA survey, Carusone observes that the 16 percent of businesses who claimed it was difficult to obtain loans is inordinately high.
“There are a high number of small businesses that are seeking financing and can’t obtain it,” says Carusone. “What some small businesses are doing is to turn to non-standard, unorthodox sources such as private capital, insurance companies or their personal assets via a second mortgage. It’s because the banks are requiring them to borrow under the Small Business Administration so they can get a guarantee.”
Carusone notes that the government shutdown of early October was having little effect on banking in Connecticut as long as the mechanism for processing payment remains operational and the Federal Reserve’s check clearing system functions.
Jacob Galloza, executive director of business development for the state’s Department of Economic & Community Development (DECD), says he is closing on average more than one financing deal per day as part of the state’s Small Business Express (EXP) program. The effort debuted in January 2012 as part of a bill passed in October 2011 that allocated $626 million to fund initiatives on job training, small business growth and repairs to the state’s infrastructure. EXP provides access to capital via a revolving loan fund, a job creation incentive loan, and a matching grant. The program has allocated $50 million for each of the fiscal years 2013 through 2015.
“This program has three different components,” says Galloza. “Two components consist of loans made by the program and the third is a matching grant that equals the amount put up by the borrower. As of the end of last week, we’ve qualified 865 businesses which have received a grant, a loan or a combination of both.” He added that a total of 2,000 applicants were included in the pool of eligible businesses since the program’s inception. He notes that some businesses other than those already approved are in the process of being evaluated. In order to qualify, companies must have 100 employees or fewer.
“We don’t provide funds for them to refinance,” explains Galloza. “They can have a loan or a line of credit with a bank, as an example, which doesn’t make them ineligible. We underwrite them to make sure that, given whatever obligations they currently have, they can afford also to take on an additional loan.”
Galloza agrees that credit appears to be loosening up a bit, although he acknowledges that his evidence is anecdotal.
“It’s common for us to talk to companies that don’t meet certain bank requirements,” adds Galloza, who notes that since its inception, EXP has loaned nearly $115 million. “For some companies, it’s still a challenge. But our goal is that, with our help, businesses become bankable and then they can go to a bank and get loans. I’m hopeful, as I think everyone is, that, getting access [to capital], whether it’s debt funding or equity funding, will continue to become easier.”
Jeffrey Klaus, Webster Bank’s regional president for the New Haven region, says his bank’s loans to small businesses are up by 12 percent this year over last. A full-service commercial bank headquartered in Waterbury, Webster has branches throughout greater New Haven. The bank underwrites small business loans on its own as well as through the SBA, notes Klaus.
“Our applications are up as well,” says Klaus. “We are one of the leaders in the state in terms of originating and booking SBA loans, which are a major credit enhancement for the small-business market.” He adds that, when companies seek loans in excess of their capitalization, banks tend to decrease the loan amount toward one that more realistically reflects a company’s actual borrowing ability, potentially yielding a smaller loan amount.
This practice may contribute to the misconception that a company’s original loan application amount wasn’t approved. In Klaus’s opinion, this doesn’t equal rejection of an applicant’s loan but more so a realistic loan amount when compared to the company’s assets.
“That would get the company through until it generates the retained earnings that would support a higher line of credit,” explains Klaus. “I don’t think those kinds of things are a rejection. They’re part of making a deal. I’d say that there are very few — probably well under 20 percent — that get an outright rejection based on whether or not there is a bad credit history or some sort of criminal record. Those are the things that completely tie our hands when we have to say, ‘I’m sorry; we can’t do business.’ The vast majority of other deals with companies that are otherwise qualified to borrow money is much more a sense of, ‘We can’t do exactly what you’d like us to do, but here’s what we can do, and here’s how, in the next three or four years, we’re going to help you get to where you want to be.’
“That’s basically good banking.”