Saturday, March 13, 2010

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Caught in a crunch (The Press-Enterprise)

Posted: 13 Mar 2010 02:40 PM PST

As federal lawmakers debate ways to create jobs by getting more money into small businesses, including convincing wary banks to make loans, company operators like Rick Jackson, of Temecula, are fighting for their financial survival.

For several years, Jackson ran Ergoware, his business selling ergonomically correct office furniture and accessories, from a storefront in the city's Old Town district. But recently he was forced to vacate the store and move his inventory into his home, after the bank with which he had a line of credit raised his monthly payments to where he could no longer afford to stay in business amid a recession-stoked plunge in sales.

Under terms of an agreement he signed in 2002, Jackson said San Diego-based California Bank & Trust last year raised his minimum principal payment, despite his never having missed payments on the $31,000 credit line. When he was unable to meet the higher payment, the bank declared the account in default and payable immediately, even though it was originally not set to mature until 2012.

It subsequently took funds owed to it from his company's bank account, also as stipulated in the loan agreement, which essentially shut Jackson's business down as his personal reserves dwindled.

While the bank's actions are legal, Jackson said the outcome has been severe distress on his personal finances and family life.

"I haven't had a paycheck in two years," he said. "It's getting to where I have trouble sleeping at night. Now, at 53 and 56 respectively, my wife and I have no medical insurance, as we were able to purchase it through the company."

"I've been making my (credit line) payments on time for years," he added. "Why do they have to go after the little guys - aren't there worse people they could be going after?"

California Bank & Trust would not comment on Jackson's case due to privacy issues.

Bank spokesman Steven Borg said its credit products in general have repayment terms that are disclosed up front.

"In terms of a revolving credit line, there are maturity dates that trigger a shift in payment from interest only to an interest and principal payment after the line terms out," Borg said by e-mail. "This is very typical in the industry and small businesses are accustomed to this."

Borg said the bank, which has 15 Inland branches, "has abided by standard lending practices" regarding good credit, positive cash flow, collateral and sources of repayment. He did not respond to questions about whether the bank has recently toughened policies in response to the current banking climate, or how many of its customers might be facing situations similar to Jackson's.

Experts say business owners like Jackson are caught in a crunch created by a severe recession that has not only cut into company revenues - and jeopardized their ability to pay their debts - but also has made lenders leery about extending new financing.

That caution stems partly from a climate where regulators have shut more than 100 U.S. banks over the past year, many of them done in by bad commercial and residential construction loans. The surviving institutions remain under close scrutiny to control lending risks and boost capital levels.

Last month the Chicago firm PayNet Inc., which provides risk-management tools to the commercial lending industry, reported that the overall volume of U.S. small business financing fell 8.6 percent in December compared with a year ago. Moderate delinquencies on loan payments, at just over 4 percent, are running at more than twice the pre-recession level, according to PayNet.

logjam

Recently six federal regulatory agencies, including the Federal Deposit Insurance Corp., issued a joint statement in which they promised to back off of their second-guessing of banks' lending practices, noting that "prudent" small business lending "will not be subject to supervisory criticism."

But others say new federal programs will be needed to break the financing logjam for small businesses, and lawmakers are debating several proposals, some of those included in larger economic stimulus efforts.

For instance, the credit union industry is supporting a change that would increase the amount of small business lending that can be done by the nonprofit, member-owned cooperatives.

The Small Business Lending Enhancement Act - now before committees in the U.S. House and Senate - includes a provision that would allow credit unions to raise the cap on the percentage of their total assets that can be allocated to small business loans, from the current 12.25 percent to 25 percent.

The measure is supported in the House by sponsors including Rep. Joe Baca, D-Rialto; and in the Senate by sponsors including Barbara Boxer, D-Calif., and majority leader Harry Reid, D-Nev.

Lending cap

The legislation is opposed by the banking industry, which was among proponents of establishing the cap 11 years ago. Credit unions contend the cap was established as part of "turf protection" efforts by banking companies, according to Bob Arnould , senior vice president of government affairs for the California Credit Union League in Ontario.

Arnould said recent industry studies found that U.S. banks' business lending has declined 15 percent in the past year, with about half of that decline occurring in the small-business sector. Credit union lending to business, the bulk of it to small companies, has increased 11 percent in that time frame, with the average loan amount at $210,000.

The credit union industry projects that raising the lending cap could create 24,000 jobs in California within the first year after passage, including about 1,000 in the Inland region, and more than 100,000 nationwide.

"It's a long way to go before it gets passed, but we think the prospects are good," Arnould said.

Mark Hawkins, president and CEO of Riverside-based Altura Credit Union, said he supports the measure's long-term goals, but it likely would not have much immediate local impact because demand for new loans among members has practically dried up since the start of the recession.

"We have money to lend right now, but the demand is just not there," Hawkins said.

Remain vigilant

Until help arrives for those seeking funding, Inland small-business advocates said company owners will need to remain vigilant about cutting costs and maintaining lean operations to get through today's tough times. Doing that will help convince lenders they are worthy of new or continued financing.

"You have to show now that you've altered your business plan or done something to keep your numbers trending up recently, even if things haven't been that good the past two or three years," said Vincent McCoy, director of the Inland Empire Small Business Development Center in Riverside. "The lenders also want to see that you've weathered downturns before this one."

In addition to government-backed loans, made through commercial lenders and administered through the U.S. Small Business Administration, McCoy said business owners should seek out smaller "microloan" programs offered by various regional development agencies.

Rachel Baranick, deputy director for the SBA district that includes Orange, Riverside and San Bernardino counties, recommended that business owners seek out mentoring, workshops and other guidance from programs such as the Inland Empire Small Business Development Center and the Inland Empire Women's Business Center.

That kind of advice can help overcome qualms of lenders. Baranick said the default rate on SBA loans has traditionally been around 3 percent, but over the past year it rose to 5 or 6 percent. In the SBA's 504 program, geared to land and equipment purchases, the default rate hit 10 percent.

While there's been a thawing in new lending over the past six months about $500 million in funding through recovery act legislation has been leveraged for about $22 billion in bank-issued SBA loans - she said businesses still need to make their case.

"Banks as always look at cash flow and the ability to pay," Baranick said. "And longevity helps."

HELP WITH FINANCING

Some resources for businesses:

U.S. Small Business Administration (sba.gov) - Resources including workshops and government guaranteed loans to qualified business owners, made by commercial lenders.

Inland Empire Small Business Development Center (IESmallBusiness.com) - Guidance on financing, business plans and marketing; certification programs for firms seeking government contract work.

Inland Empire Women's Business Center (iewbc.org) - Counseling, workshops and other resources for women business owners, including targeted services for Latina owners.

Service Corps of Retired Executives (score.org) - Free one-on-one counseling sessions with corporate experts in a variety of fields, offered by appointment.

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