Credit check | As lending freezes up nationwide, Maine's small businesses feel the sting
Deborah and Paul Leonard run Mainely Technology, a company that develops websites for small businesses, out of their two-bedroom Lewiston apartment. Payables and receivables are in the dining room. Website development and technical assistance can be found in their bedroom.
The Leonards started Mainely Technology in 2005 at home and eventually moved to an office in Lewiston. But now, after being rejected for a loan they needed to maintain their office, Mainely Technology is back at home. On their website, the words “We’re moving” are plastered across a photo of their former office space.
“Small business owners are caught right in the middle of a whirlpool,” Deborah said. They need to expand to make money, but can’t qualify for a loan without those profits.
As a recession and frozen credit markets grip the nation’s attention, small businesses in Maine are struggling to stay afloat. Some owners don’t even bother applying for much-needed loans, scared by the headlines and convinced banks just won’t lend. Others who do apply are met with rejection. But while national banks’ bad bets on subprime loans have left them hemorrhaging, Maine’s local banks insist they have money to lend. The problem, they say, is that people aren’t asking for it.
Business owners have reason to be disheartened. The Federal Reserve and Treasury Department’s Nov. 26 announcement of a $200 billion infusion into the commercial lending markets exposes the nation’s dire liquidity shortage. It is the first time in U.S. history that the two agencies have intervened to finance consumer debt like business, student and car loans.
That increased liquidity sends a positive message to decision makers who control the credit pipelines, but it’s far from an instant fix, said Chris Pinkham, president of the Maine Association of Community Banks. Big-name financial institutions are paying the price for risky mortgage bets, investments Maine’s community banks rarely had on their books.
Fewer loans, fewer applicants
Unlike Wall Street investors, community banks didn’t have the appetite for risk or the resources to invest in and sell subprime mortgages to outlets like Fannie Mae and Freddie Mac, Pinkham explained. “It’s not our business. We’re in the business of having long-term relationships with customers.”
Geoff Gattis, executive vice president of commercial lending at Bath Savings Institution, stressed the same point. “What we lend is the checking and savings and retirement accounts of our customers, not a nebulous pile of money,” he said.
That means some customers are migrating from bigger banks after being rejected for financing, Gattis said. “We’re getting calls every day,” he said.
Overall, however, loan requests are down as business owners wait on the sidelines for conditions to improve, according to Pinkham. “We really are ready to lend,” he said, but “we’ve not seen the demand at all.”
Though the industry doesn’t track Maine bank and credit union loan demand statewide, U.S. Small Business Administration figures show loan volume is down considerably for this time of year. The Maine SBA guaranteed 63 loans totaling $5.7 million as of November 2007, compared with 42 loans totaling $4.2 million as of last month. All of last month’s top five lenders were community banks, compared to two in 2007.
Demand for all loans at Maine’s credit unions in November slowed considerably, with customers hearing that credit sources have dried up, said John Murphy, president of the Maine Credit Union League. “We certainly have money to lend, as we did six months ago or 12 months ago,” he said.
The trend is the same nationwide. A November study by the National Federation of Independent Business on small business trends found that only 33% of respondents reported regular borrowing, a historic low.
And an October survey by the U.S. Federal Reserve Board on bank lending practices over the last three months shows nearly 90% of U.S. banks reported tightening up on credit lines to small firms, or those with annual sales under $50 million.
Almost all institutions cited the nation’s economic outlook as the reason for more stringent lending standards and terms.
While national and regional data paint a scary picture, Maine’s community lenders insist that prudent practices have, so far, insulated the state from much of the fallout.
The country’s credit outlook is bleakest for investors with hundreds of millions of dollars at stake, not for Maine’s small businesses, said Michael Finnegan, senior loan and investment officer at Coastal Enterprises Inc. in Wiscasset. “Underneath, there’s a whole lot of small business lending that can and should occur,” he said. “Don’t be discouraged by everything you see or hear.”
Much of that money is available through less traditional outlets. On Dec. 4, CEI announced a partnership with Bangor Savings Bank to offer $9.5 million in low-interest loans to businesses in economically depressed areas of Maine. The effort is the first of its kind in the state, and makes loans of up to $2 million available to small and medium-sized businesses under the Treasury’s New Markets Tax Credit program, with lower interest rates offered on 25-year loans, according to a press release. Organizers hope the loans will help small businesses struggling to survive in the face of a recession and tightening credit nationwide.
But the same conservative practices that protected local banks from the liquidity crisis are in fact making it difficult for businesses to get loans when they need them most, claims Mark Delisle, state director of the Maine Small Business Development Centers.
SBDC counselors all over the state report clients are struggling, Delisle said. Many business owners are hunkering down and putting the brakes on growth plans until the economy recovers.
“Access to capital is more difficult,” he said. “There isn’t another way to put it.”
Good credit matters more
Still, bankers in Maine insist their underwriting standards remain largely unchanged since the credit crisis began. The economic climate has, however, led lenders to more closely scrutinize applications and challenge growth projections. Borrowers should expect a renewed emphasis on the traditional 5 Cs of lending: capacity (or cash flow), capital, collateral, conditions (of the economy, industry and the bank itself) and character (the willingness of the borrower to repay the loan).
When liquidity was better, many banks were willing to compromise on some of those requirements and so pushed debt repayment ratios higher, Finnegan said. “We got a little crazy, and we’re in that period of atonement/reconciliation,” Finnegan said.
Frustrated borrowers attribute loan rejections to the soured economy and tighter credit, rather than the fundamentals informing bankers’ choices, according to Bath Savings’ Gattis.
“If you’re qualified, that’s how we make money,” he said.
Stricter lending requirements certainly didn’t help Deborah and Paul Leonard’s financing efforts. The Leonards had to apply for a loan for the first time after financing Mainely Technology themselves three years ago. Rent on their office space was about to go up, just like their utility costs, and they wanted to hire another employee, Deborah Leonard said. So they turned to a big national bank, where they held a business account, car loan and checking account. The roughly $15,000 loan would be used for growth, high-end advertising and an additional employee for their company, which generates an annual revenue of about $15,000 and is not currently profitable. After a few e-mails, postal correspondence and one phone call, they got their answer — a “flat- out no,” Leonard said.
The bank cited the couple’s personal credit issues first, then the fact that their business isn’t incorporated, a process that costs upwards of $800, Deborah Leonard said. The Leonards believe banks should give businesses like theirs a chance, despite their shaky balance sheet, precisely because the country is in a recession.
“Given the times, banks need to step outside of their normal boundaries and realize that small businesses can eventually turn into big businesses,” Leonard said.
Lessons in denial
Maine’s credit environment was the topic of discussion last month in Augusta.
“The money is there, it’s just a lot harder to get,” according to Nancy Smith, chair of the Legislature’s Business, Research and Economic Development Committee, which convened a hearing on the state’s credit environment. Small business owners told the panel Nov. 17 they’re having a hard time securing financing, even as banks insist the loans are out there, she said.
Rachel Crommett of Vassalboro knows that firsthand. She and her husband have applied five times since May for a $350,000 loan to purchase property to expand their business, Fifteen Mile Stream Guide Service, which generates $60,000 in annual revenue and is profitable. The banks, a mix of local and national, all have said no.
“They all say there’s money to lend,” Crommett said. “They also tell me if I’d applied for the loan nine months ago I would have gotten it.”
The Somerset County property the Crommetts seek to buy includes several buildings, a restaurant and a rafting outfit. Business has been slow for the existing owner, which made the banks question Crommett’s growth projections, she said.
“If everything’s in a straight little pretty line, yeah, they’ll give you money,” she said, sounding exasperated.
A loan rejection from a bank, or several banks, can feel like the end of the road for struggling small businesses. But while financial institutions are returning to tried-and-true techniques, business owners need to get creative. State and local agencies like the SBA, SCORE, CEI and the Maine SBDCs can assist with obtaining financing, crafting business plans and developing marketing strategies.
People should check their financials and operations for inefficiencies first, said the SBDC’s Delisle, because the resulting savings could preclude the need for any loan.
Leonard turned to the SBA for guidance, and will await their advice before applying for any more loans, she said. She’s researching community banks and credit unions, which haven’t been crippled by shady Wall Street investments.
For now, she and her husband will do business from their home.
Rachel Crommett is working with Coastal Enterprises Inc. to refine her business plan. She and her husband remain discouraged, but they’ll keep applying for loans, she said.
“Every time I get denied I learn something new,” Crommett said.
Jackie Farwell, Mainebiz staff reporter, can be reached at jfarwell@mainebiz.biz.
Most Recent
Most Recent
Comments