Cash is the lifeblood of any small business, and access to financing can be a critical factor in whether a small enterprise can grow and thrive. Businesses need credit to hire and to make capital investments. It may sometimes seem as if the chips are stacked against them.
For 17 years, Joe Petti ran a small manufacturing firm, Delaney Engineering in Milford. He says one of the biggest issues he faced growing his company was dealing with the banks.
“I had a million dollar contract from one of my customers, who wanted a number of components completed in a three month period. I had to lay out $600,000 in that three month period, and I didn’t have it. I went to my bank. I presented the million dollar PO. I could not get a cent out of them, because I had hit my limit on the line of credit. Now that’s devastating for small businesses.”
And that’s a common story, according to economist Don Klepper Smith who runs Datacore Partners in New Haven. He conducts a quarterly credit survey for the Connecticut Business and Industry Association.
“About one in every three firms in Connecticut is finding it difficult to access capital. Given demand being somewhat less than robust at this point, we’re talking about a risk averse lending environment and banks are cautious about where they lend and who they lend to.”
“Every week you can pick up the paper and see some evidence of the fact that the large banks still are not lending money deep into the communities.”
Bill Placke has just become CEO of new community bank in New Haven, Start. He says the biggest issue with the lack of available credit is the squeeze it’s putting on employment. If small businesses can’t grow, they can’t hire.
“We need to help create jobs in this city, so I feel an enormous burden to be a catalyst for that kind of change.”
Start wants to help low-income entrepreneurs to access capital, but that’s often a challenge.
“We will not lower our credit standards. This will not be kind of the court of last resort. It will not be the place you come if you can’t get it from four or five other banks. The difference is we just intend to work tirelessly with a borrower to find a solution. So if there’s a gap in the underwriting process, we’re going to try and help that person fill the gap.”
One of those gap fillers can be the Small Business Administration, which often steps in to guarantee up to 90% of the value of loans that businesses get from banks. Connecticut has a similar effort at the state level through the Connecticut Development Agency’s Urbank program. Bernard Sweeney runs the SBA’s Connecticut office.
“Most small business owners don’t have great credit. Corporations have great credit, by virtue of their CPAs that make sure that everything’s hunky dory and everything’s right. They can do a lot of accounting tricks of moving inventory and things like that. A small business can’t do that.”
And indeed there are many businesses whose credit or outlook is so shaky that can’t even qualify for a loan guarantee. The Community Economic Development Fund works with businesses that are otherwise considered unbankable – traditional lenders won’t touch them. CEDF actually gets a pool of money from the traditional banks as a way for them to fulfill their regulatory requirement for community reinvestment. The Fund’s CEO Donna Wertenbach says she’s seen an interesting change in the last year or so. Turn the clock back to early 2010 and the aftermath of the credit crunch for small businesses:
“They were refinancing their credit cards to lower their interest rates from 30 back down to 8 or whatever, they were refinancing lines of credit that had been called or pulled from the traditional banking world. A significant piece of what we were looking at a year ago was restructuring debt for small businesses.”
Now she says the picture is a little different.
“The size of the loans that they are requesting has gone down dramatically, they’re very reticent to take risk, because they’re still not sure about this economy and how long they’re going to be in it. But they seem to be looking for capital more for very early stages of some very conservative, baby-steps of growth.”
One thing that may have acted as a partial catalyst for this change is new cash set aside by the state in last year’s jobs bill. $15 million is earmarked for small business loans at 4 percent interest. Businesses must employ fewer than 50 people to access that cash through CEDF and six other agencies around the state and they must use the cash to grow their companies.
“It’s very inexpensive capital so people who might not have been comfortable looking at capital that might be at 8 or 9%, which is the norm, is interested in capitalizing on this 4% money. We’re not sure how long it’s going to last—it’s a limited pool and it’s on a first come-first served basis—but there has been a tremendous amount of interest in this four percent money.”
Wertenbach says it’s early days yet, but the new loan pool could have an effect both on the small businesses who qualify for the money and on the banking sector that for a time at least, is being undercut by publicly-financed credit.