Tight credit hurts shops

William White, owner of two small businesses in Okemos, would like to redevelop the property where his businesses—White Brothers Music and the Travelers Club International Restaurant & Tuba Museum—are located. While he seeks municipal approval of his plan, his mortgage term is up and his current lender declined to renegotiate the loan.

If White doesn’t find a new lender before September, he says he may be forced to close or relocate one or both of the businesses.

White is not alone. It’s getting tougher for retailers and other small businesses to borrow money.

Banks and other lenders across Michigan and the U.S. have tightened their lending requirements, according to Gail Madziar, vice president of communications Michigan Bankers Association.

The total amount loaned by commercial banks in Michigan was 26.7 percent lower in Q1 2008 than in Q1 2007, according to data provided by the Federal Deposit Insurance Corporation (FDIC).

“Michigan banks may have tightened credit somewhat earlier than the rest of the nation, but now banks throughout the U.S. are probably comparable in their tighter lending requirements,” Madziar said. “In addition, national banks do not have tighter requirements for Michigan-based businesses—they use the same criteria for commercial loans wherever the borrower is located.”

White says his businesses are viable, “but banks and lenders don’t see it that way.”

“Everybody’s nervous about the economy, especially in Michigan, and nobody wants to give out loans to anyone unless they’re ironclad guaranteed.”

White believes that part of the reason his loan requests have been declined is a temporary drop off in business in 2005 due to construction on Okemos Road near his property, which led to a 20-percent drop in business that year.

But long term, the businesses have been modestly profitable, although declining slightly in recent years like many similar businesses, according to White.

U.S. banks reported a tightening of commercial credit as well as a decline in loan demand over the last three months. The cost of loans also went up, with 65 percent of banks saying they raised loan rates for small firms, according to Forbes.

Loans backed by the U.S. Small Business Administration (SBA)—where independent retailers and other small businesses often turn when credit gets tight—are down 34 percent in Michigan compared to last year. The total loan amount of these loans is down 12 percent from last year, according to Richard Temkin, District Director for the SBA’s Michigan District Office.

Part of this drop-off is simply low demand—fewer businesses are seeking loans. In addition, it appears that some banks are not referring people to SBA-backed loans as often as in the past, said Temkin.

White’s experience with his current lender bears this out. He is not new to the lending process and knows what lenders expect and how to present a good business case. He attributes his current difficulties to general anxiety about the economy and, in particular, his current lender.

“When I first went to my bank about this loan, their SBA loan department told me I was an excellent candidate for an SBA-backed loan,” said White.

The commercial loan officer who reviewed his application, however, declined the loan and did not even submit it for review by the SBA, according to White. He was told the bank would not redo the loan under any circumstances.

“Several lenders told me they don’t bother to do SBA-backed loans. Too much paperwork and their commercial loan department has the same criteria as the SBA, so there’s no point, they told me.”

Temkin points out that the loan environment is complex, and some types of loans—for example, SBA’s 504 loans, designed for financing equipment and other fixed or hard assets—are actually up from last year. Demand for loans for smaller amounts is significantly lower, while somewhat larger loans are only slightly lower, said Temkin.

The SBA itself does not grant loans other than Disaster Relief Loans. Instead, it guarantees against default certain portions of business loans made by banks and other lenders that conform to its guidelines.

Typically, lenders who do many SBA-backed loans will recognize good candidates and submit those loans to the SBA for review. However, not all banks or loan officers are the same, and a borrower who is turned down or offered unfavorable terms should at least ask about an SBA-backed loan, advises Temkin.

“Retailers with a strong business case for a loan should not let the news of tight credit put them off,” he said. “If turned down at their bank of account, they should try another bank or credit union.

White says he even tried going to loan brokers who advertise that they will present a loan request to multiple lenders and find a loan.

“I’ve talked to a lot of loan brokers; I’ve even given a few of them an advance fee of $1,000 or $2,000 for the guarantee they’ll find a lender. But nothing came of it and they keep the fee.

“One broker came up with a loan but it was with impossible terms—18 percent and 30 points up front.”

The Better Business Bureau is concerned about “advance fee” lenders and is warning businesses to stay away from anyone guaranteeing a loan for an upfront fee.

“We’re seeing an increase in the amount of fraudulent activities due to the current U.S. economy and credit crunch,” said Edward Johnson, president and CEO of the Washington chapter of the Better Business Bureau.

Offers for advance-fee loans often come in e-mail solicitations or appear in newspaper or Internet ads. The fraudsters set up professional-looking websites. They ask for fees ranging from $1,000 to several thousand dollars, said Johnson.

In many cases, the alleged lender simply vanishes once the fee is paid.

“They are there for a short period of time, take in a handful of advance fees and then the websites go down.”

It is illegal for any lender to require a fee up front before making a loan. A lender’s fees are typically paid when the loan closes or are built into the loan.

The BBB encourages businesses that have been the victim of advance-fee lenders to notify the local BBB branch and to check out the BBB profile of any alternative lender or broker before doing business with it. More information is available at www.bbb.org.