By Joyce M. Rosenberg
Dan Mitchell has borrowed $3 million in the past year and a half to buy real estate and equipment to expand his brewery, Ithaca Beer Co.
It hasn’t been easy.
Mitchell went to at least four banks in Ithaca, N.Y., looking for a loan. His sales were growing 25 percent a year, and his distributors wanted to buy more beer from him.
But most of the loan officers just handed him applications and told him to send the papers in. Even a bank that had already loaned Mitchell money wasn’t interested. He said he still doesn’t know why his own bank turned him down.
Mitchell’s experience is common.
Banks remain hesitant to lend, and when they do, they’re asking for more information and toughening requirements. It’s a trend that is stalling the pace of lending to smaller companies.
PayNet, a company that analyzes commercial loans, has an index that tracks loan applications by small businesses. The index peaked in the fourth quarter of 2008 at 115 as the financial crisis hit. Since then, it has fluctuated between 70 and 75.
But Mitchell’s experience proves that there is some lending going on. He finally got the loans he wanted from M&T Bank.
Before the recession, companies of all sizes could get loans like lines of credit, said Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp., a service that evaluates the creditworthiness of businesses. These days, the most successful borrowers are those that are almost medium-sized, he said. Generally, according to the Small Business Administration, a small business has fewer than 500 employees.
When banks do grant loans, the requirements are tougher. Often the company has to meet higher revenue and profit levels to get loans.
Someone hoping to buy a well-established franchise also will find it hard to borrow, Stibel said. People looking to borrow money for a franchise need to show a record of success as a business owner or guarantee they’ll repay a loan out of their personal account.
Even though it’s harder to get a loan, successful applicants may find that some of the terms are more relaxed.
Loans are averaging 56 months, up from the low 50s during the recession, said William Phelan, president of PayNet. Borrowers also are benefiting from low interest rates as the Federal Reserve keeps its benchmark interest rate close to zero.
Still, would-be borrowers aren’t lining up at the door. Many remain skittish after the recession and are uncertain about the economic recovery. According to The Hartford’s Small Business Pulse study, only 20 percent of the small business owners it surveyed feel “very optimistic” about the economy.
However, there are some lending bright spots. Agricultural businesses and the companies that serve them are more likely to get loans because their business is seen as more recession-proof, Phelan said.
Transportation and construction companies aren’t attractive to bankers because they were among the hardest hit in the recession.
There probably isn’t a sure-fire formula to follow to get a loan. But owners who have taken out loans recently were successful because they had built a relationship with bankers over time or put together an application package that went well beyond the basics that a bank requires.
“You don’t just ready, fire, borrow,” said Kathryn Petty, who has gotten three loans totaling $300,000 in the past year from her longtime community banker and from a national bank.
Petty, president of White Lion Tea, a manufacturer and retailer of teas in Scottsdale, Ariz., said the long-term relationship she had with her local bank made the process easier. But she also said she got loans because she prepared a cost-benefit analysis that told bankers what she would do with the money, how it would help her business and, in turn, how it would help her pay them back.
One loan officer told her, “You’ve done all my homework.”
— Rosenberg is a business writer for The Associated Press.