Tough times for struggling local businesses

By Diane Arnold

For most small businesses, 2008 brought tough times and a stark economic landscape filled with layoffs, wage reductions, slumping home sales, absentee customers and rising prices for food, fuel and energy.

If that wasn’t enough, Murphy’s law kicked in to change access to the capital markets and business credit for years to come. It started with the purchase of Countrywide Mortgages by Bank of America in January, followed by the Sept. 15 filing of bankruptcy by Lehman Bros. and culminated with the automotive bailouts in December.

Collectively, these actions threw our monetary system into turmoil, forcing both banks and regulators to re-evaluate the credit and collateral requirements for all types of loans. Small businesses were particularly impacted when their lines of credit were reduced, credit card rates increased and spending limits lowered. Banks, saddled with multiple foreclosures, became unable to lend against equipment and property as they once had done.

Since the beginning of 2008, the Small Business Development Centers across Virginia have been besieged by well-run and established businesses suffering from slumping sales, slow or uncollectable accounts receivables and accumulating inventory. Cash became king once again, and the rush was on to find creative ways to pay bills, buy necessities and keep the businesses open.

Responding to the onslaught of adverse changes facing clients, the counselors of the Virginia SBDC Network developed a comprehensive checklist with suggestions for surviving in an economic downturn.

Entitled “Strategies for an Economic Downturn,” it was distributed by SBDC’s across the state to their respective clients and shared with their resource partners (banks, Realtors, CPAs, etc.) to get a wider distribution. Anyone wishing a copy can pick up one at a local SBDC office or download one from http://www.virginiasbdc.org. (In the publications folder, it’s under resource tab.)

In March 2008, our area was particularly hard hit when the Small Business Administration had to stop guaranteeing its much used Community Express loan program because it was tied directly to their most popular and robust loan program, the 7a. In other words, 7a loans were not being made and the Community Express program was limited to a percentage of 7a loans made by banks.

Since we currently do not have a micro-loan program in this area, the Community Express program fills the void allowing for small loans of $5,000 to $50,000 for existing businesses and providing funding for new start-up businesses. The program was restarted in November with dramatic changes in both credit requirements and eligibility.

At the beginning of 2008, our office was able to submit loan requests by applicants with FICO credit scores as low as 575 — but not anymore. To submit a Community Express loan application, the applicant must have a score of 680 with all three credit bureaus. This was a significant change since the average American has a Beacon FICO credit score of 677! All three credit bureaus use the same Fair Isaac Corp. algorithm for scoring, although they use different terminology.

The point is the goal post moved from fair to midway up the scale for good credit as a floor for loan eligibility.

Why is this important to the small business? Most small businesses have run up their lines of credit, maxed out their business and often personal credit cards and factored their accounts receivable (borrowed against what is owed them for a fee to the factoring company) and/or sold off assets not used or not producing income. They have used both their personal and business resources to keep afloat and in doing so, have affected their credit scores negatively.

Now, we have the great impasse. The business exists but cannot grow — or perhaps even survive — without an injection of cash and the owner is not eligible because of the credit score.

The much-touted American Recovery Act loan program was announced back in February by the SBA with a promise to provide relief for small “existing” businesses struggling with mounting debt and lack of cash. In brief, this loan program allows a small business to borrow up to $35,000 interest free, have a 12 to 18 months grace period (deferred payments) and a five-year repayment period. Sounds great! Unfortunately, it is not well received by most SBA banks.

Why is this?

First, these small loans ($35,000 is considered a micro loan) require processing like a full 7a loan and they must be held on the bank’s books and managed and serviced for six to six and a half years depending on the disbursements.

Second, the banks are not allowed to charge a fee for processing the loan and have a 2 percent interest cap they can add to prime. So, it was not really a surprise to see that those banks expressing an interest in perhaps using the loan would only do so for their existing business customers.

It is important to remember that our banks also are businesses, and they have suffered losses during this economic downturn. Unlike other businesses, banks by law must keep their reserve accounts at certain levels established by regulators. Banks make their money via interest charges and fees for banking services. Processing loans without fees and low interest rates can only be done on a limited basis if a bank is to maintain required reserves and meet its own expenses.

The facts are cold comfort to the multitude of small business owners who continually call our office for help. In most cases, they are banking with a non-SBA lender who certainly is not going to go through the process of becoming an SBA lender to make a loan that will not pay for the processing.

For those businesses that have relationships with an SBA lender, the time and paperwork can be daunting. Another concern with this ARC program is the restriction that the money can only be used to pay down existing debt. What SBDCs and bankers are seeing in the marketplace is a lack of cash or working capital to keep things moving. Conversations with several SBA lenders recently give our office hope that the program may be restructured allowing the money to be used for working capital.

To survive, small businesses need to stay on top of their financials by conserving cash, cutting expenses, billing customers as soon as possible and focusing on their existing customer base.

They also need to keep close to their banking partners and be upfront with any creditors/suppliers, explaining their situations and laying out a plan for repayment if behind. If they get behind with their taxes, it is imperative to sit down with the tax agency representative and negotiate a reasonable agreement for catching up. It is not the time to “think about it tomorrow” and hope the problem goes away.

The lifeblood of any business is cash — and cash is hard to come by these days. Businesses and banks are both being buffeting by the economy and the ever-shifting landscape of the government regulators. Will it get better? Eventually, but it would be unrealistic to expect the capital markets to change anytime soon. The markets still face the impending implosion of the commercial real estate sector and the aftermath that will generate as banks accumulate more paper and be forced to further tighten up on credit.

* Arnold is director of the Danville office of the Longwood Small Business Development Center. E-mail her at .