Small Business Makes Adjustments As Credit Markets Apply Squeeze

Restauranteur Grant Gullett did not heed the warnings of those who told him not to open a new business in an economic downturn.

Four months later, he admits that running a restaurant in a slow economy can be challenging, but he’s optimistic that Gullett’s Gourmet, which opened off Dickson Street in June, can weather the storm.

“I had an opportunity to do something I’d always wanted to do,” Gullett said. “So I hopped on.”

Despite the tightening credit market, Gullett said he didn’t encounter some of the problems getting his loan from Simmons First Bank of Northwest Arkansas that other business owners have experienced. But he did apply for a more modest loan, he said, relying on friends and family for additional support.

In his original business plan, Gullett had considered buying a location for his restaurant. His decision to lease a space, due largely to the availability of space for lease around the Dickson Street area, allowed him to apply for and receive the amount he needed.

According to the Federal Reserve’s July 2008 survey of senior loan officers, about 65 percent of banks said they tightened their lending standards for small business loans over the past three months. Seventy percent said they were charging more for those loans.

But anecdotal evidence from several small business owners and bankers is mixed. Most said the credit crunch hasn’t hit them full force yet.

As loans become more difficult to qualify for, consultants at the Small Business Development Center at the Walton College of Business in Fayetteville are advising their clients to think small when starting a new business.

Center Director Larry Brian said his mission is to help small business owners obtain loans. But since about May, that mission has been increasingly difficult to accomplish.

“We’ve probably had about 10 clients who we believe would have received loans last year but were turned down this year,” Brian said. “Banks have been extremely cautious about loaning to new business startups or to expand existing businesses.”

The problem is not that the banks don’t have the funds available to loan, he said. In fact, that’s not the case with most of the community banks in Northwest Arkansas.

“It’s just the fact that small business loans are generally more risky than other types of loans,” Brian said. “Banks are concerned about the economy in general, so they are taking less risk than they normally would.”

While starting a new business is always a challenge — 50 percent of new small businesses fail within two years, Brian said, and 80 percent of them don’t make it past seven years — starting, expanding or even maintaining a business during a credit crisis is particularly tough.

In an August National Small Business Association survey, 67 percent of businesses polled said they had been affected by the credit crunch. Fifty-three percent cited economic uncertainty as the greatest threat to their company’s growth or survival

Many business owners are scaling back and individuals who were planning to start a business are choosing to wait.

Loans guaranteed through the Small Business Administration have declined significantly over the previous year.

The number of 7(a) loans given in the 2008 fiscal year, which ended Sept. 30, dropped 30 percent from 2007, the SBA reported.

The total dollar amount guaranteed through the program dropped by about 11 percent from the $14.29 billion in loans backed in 2007. The SBA backed 69,434 loans in 2008, down from 99,606 in 2007, totaling $12.67 billion.

While the SBA doesn’t directly fund 7(a) loans, it offers a guarantee on a percentage of the loan, which is intended to make banks more willing to risk lending to new businesses.

The numbers show that banks are being more cautious even if the loan is SBA guaranteed, Brian said.

It’s also a sign that fewer businesses are submitting applications for SBA-backed loans in light of the economic situation.

“People who were about to start a new business are not doing it because of the economy,” Brian said. “It’s a combination of people being cautious as well as the banks.”

While the Small Business Development Center has seen a drop in clients looking to start a new business, consultants are seeing an increase in the number of business owners who are struggling and need assistance.

Shifting Focus

The primary focus of the Small Business Development Center is changing, Brian said, from helping start-ups get funding to helping existing businesses stay in business.

Brian is advising his clients to build Web sites, optimize existing Web sites, learn guerilla-marketing techniques, and improve their cash flow management.

“We want them to be aggressive as far as marketing and visibility but hold the line on expenses, hiring new folks or adding benefits,” he said.

For the few clients who are choosing to brave the troubled market, Brian said they need to have a good-looking business plan and financial outlook.

Small business need to have at least 20 percent equity injection, he said, and at least 100 percent collateral for a loan.

“Banks are more concerned with equity, collateral and cash flow that an applicant would show on projections,” he said.

Brian also tells clients to have a back-up plan.

“We always tell people that come in who we think might not be eligible for loan but have a good business plan to look to family and friends that they can sell their business plan to, we are seeing that happen a lot,” he said.

“More people are realizing right now that loans are tough to get and they’re focusing on raising funds through alternative methods.”

Business Changing

Craig Pasquinzo, who owns the Northwest Arkansas branch of waste removal company Southern Disposal in Centerton, said the credit crisis has changed the way a lot of his customers do business, particularly in the construction industry.

Prior to the slump in the Northwest Arkansas construction market and the onslaught of construction loan delinquencies, Pasquinzo said he extended lines of credit to many of his customers because he trusted they would be able to pay him.

“You knew another project was coming down the road for them and that the banks were lending money,” he said. “Now, with builders filing for bankruptcy and everybody owing money and now that the banks aren’t playing the game anymore, everything has basically gone back to a cash-based business.”

Pasquinzo said his goal now is to get cash upon delivering a waste container to a job site, or charge the customer’s credit card ahead of time in order to ensure payment.

“It goes back to a lack of trust, but it’s what you have to do in order to survive,” he said.

Pasquinzo has also changed his pace of replacing or buying new equipment.

When he entered the Northwest Arkansas market in 2004, during the peak of the construction boom, Pasquinzo had one truck and eight open-top construction style containers.

He quickly bought 50 more containers to keep up with the demand.

“We didn’t even have time to paint our number on the side of them because they were needed at job sites as soon as they arrived from the factory,” he said.

He could have used a lot more containers at the time, but Pasquinzo said he was cautious about how many he bought —something he’s grateful for now.

That was when construction accounted for about 80 percent of his business, now it’s down to about 30 percent.

While he’s not going to be purchasing new containers anytime soon, 85 percent of his current inventory is being used year round.

Being cautious has served him well during the downturn, Pasquinzo said.

“Whether the economy is good or bad, you have to make good decisions on the front end,” he said.

The lending industry, while not completely at fault, needs to follow that same advice and do more homework on a business before offering credit, he said.

“I don’t think we’ll ever go back to that same type of lending scenario,” he said. “It has to have more structure.”

Amy White-Beard, the owner of women’s clothing store Something Urban in Fayetteville, said she’s also seeing the impact of the credit crisis even though she pays for all of her inventory as it arrives.

Inventory has become more difficult to stock as her suppliers in Los Angeles aren’t receiving enough orders to make the products she buys.

Some of the national retailers are having trouble getting credit to purchase the large orders that keep suppliers in business.

White-Beard was so low on inventory this summer, she had the worst sales for June that she’s had since opening the business in 1999.

Banks Safe

Despite the national credit crunch, community banks are not experiencing the same troubles as the large financial institutions.

Jim Coffey, vice president and commercial relationship manager at Metropolitan National Bank in Little Rock, said the bank still has a healthy appetite for small business loans.

“Obviously in this type of economic situation, we have to look at little bit closer at loans depending on the industry,” he said. “But we’re not seeing too much of a problem with small businesses getting access to capital.

“Sometimes they have to visit a variety of banks that like different industry types- — we may have had a bad experience with one type of industry but the bank down the street may like that type just fine.”

Industries that rely more on consumers’ discretionary income, such as retail and entertainment, get more scrutiny, Coffey said.

Jim Taylor, regional vice president of First Security Bank, said he’s seeing different types of requests from customers.

“People are looking for alternative sources of working capital, such as lines of credit secured by assets, or they’re having to borrow against their accounts receivable because people who owe them money are slow in paying them back,” he said.

Mark Ryan, executive vice president and loan manger at Arvest Bank of Rogers, said his bank has not changed its lending standards in spite of the recent credit markets.

Making fiscally sound investments, he said, has served the bank well during the credit crisis.

“More importantly, it’s served our customers well during this time period,” he said.

But Ryan has seen a decline in loan applications from the small business community.

“The loan demand is not as strong,” he said. “Small businesses are holding back because the credit crisis has had an indirect effect on them.”

The average spender is more frugal with their discretionary income, and is less likely to purchase a new car, new furniture or embark on a home remodeling project, Ryan said.

“That’s had an impact on a lot of small businesses,” he said.

“They’re having to adjust and pull back, they’re not as apt to go out and buy new equipment or stock up on inventory.”