Business Loans get rockier. Who's hiring?

By Hannah Wallace August 31, 2008

Qualifying for a business loan is indeed more difficult these days. Even well-established businesses need to prove their agility at navigating the rough rapids of the downturn.

“It is more challenging to obtain a business loan. In today’s economy, revenues and cash flow are down. It makes it more difficult to qualify,” says Tom Quale, president and CEO of Landmark Bank. “Banks are being more cautious and more prudent in their underwriting.”

In this market, “Real estate collateral values are down as well as cash flow of businesses tied to the residential real estate market,” agrees Brian Nicholas, regional president of Wachovia Bank. “New home construction has dropped dramatically in the Gulf Coast.”

Plummeting real estate values have crippled small business access to collateral, since many entrepreneurs secure loans with their homes or other real estate properties.

“That equity has disappeared,” says Quale.

A National Small Business Association ( member survey released in April reported bank financing for small businesses is at a 15-year low. More small business owners have relied on credit cards (44 percent) during the past 12 months than bank loans (28 percent), and the smaller the business, the less likely it is to obtain bank financing.

Local bankers are tight-lipped about their loan numbers. The federal agency that guarantees some bank business loans, the Small Business Administration, however, reports that the numbers of SBA-backed loan approvals have decreased significantly in both Sarasota and Manatee counties this year. From October 2007 through June 30, 2008, Sarasota County’s volume was down 45 percent, and Manatee’s was down 31 percent over the previous year.

“Our loan numbers have declined drastically because of overall economic conditions in Florida. Lenders nationwide have taken a stringent and guarded position when it comes to offering credit. At the same time, borrowers are becoming more cautious about taking on more debt in these uncertain times," says Francisco "Pancho" Marrero, SBA South Florida district director.

So how can entrepreneurs acquire loans to expand, change course or simply weather the storm?

First, they can take a second look at SBA-backed loans. Although the SBA approval process has a reputation for being slow and cumbersome, the perception isn’t entirely true. “SBA loans are technical. They do require a lot of documentation,” says Carmie Snider, vice president and regional sales manager for Wachovia Small Business Capital. But as a preferred SBA lender, Wachovia, for example, is able to turn around completed applications within an average of seven to eight days.

Banks feel more secure approving a loan that is 75 percent guaranteed by the SBA, while businesses can benefit from higher loan-to-value ratios and longer-term financing. The best candidate is a company that is at least two years old, posting increased sales and borrowing to move from a lease to owner-occupied real estate. SBA is also very good at financing partner buyouts of successful companies, Snider says, but is not the solution for new enterprises. “Startups are very tough,” Snider says.

Businesses seeking bank loans should first undertake an honest evaluation. Before taking a seat across the desk from a lender, “Go up to the 5,000-foot level and assess the situation,” says Quale, and make a plan. Businesses need to be a little bit more creative and do what they can to hold on, such as taking on partners or co-signers who have provided collateral.

Drawing in the financial expertise of a CPA or business advisor is critical, as it can make or break the business plan. “In difficult times, business owners are concerned about paying the cost for a CPA, but advice from a CPA is well worth it,” Quale says.

It’s not unusual for Landmark Bank to schedule conference calls or joint meetings with CPAs “to help us understand the business and how they are addressing challenges,” he adds.

Communication with a banker and other professionals can infuse a long-term outlook and objectivity into a business plan. So business owners shouldn’t wait until the situation is dire to ask for that loan. “The key is to have a good ongoing working relationship with a banker, and not come in only in a distress situation,” Quale says.

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