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Businesses grapple with lending pinch
Smaller firms find faster way to secure funds as banks constrict loan availability
By ARIELLE KASS
August 18, 2008
Keith Peer couldn't wait the two months he thought it would take to receive approval on a bank loan that would allow him to expand his staff at Central Command Inc., a producer of anti-virus software in Medina, where he's president.
Mr. Peer didn't want to sit tight while a bank waded through his financial statements, so he went to On Deck Capital, a company that's taking advantage of long lead times and tightening lending standards at traditional banks. He secured a loan in less than 36 hours, and had money in the bank after a week.
Small business borrowers and even lenders themselves say a slower economy and the ongoing credit crunch brought on by woes in the mortgage market mean money isn't as easy to come by as it once was.
That isn't to say money can't be found. But instead of looking for reasons to lend to companies, banks are looking for reasons not to lend, said Michael Morris, Cleveland director of Canadian lender Roynat Capital.
Mr. Morris said the price of loans is higher and the terms generally more restrictive than they were a year ago. While banks are still lending to larger, established businesses, many smaller companies aren't as fortunate because they're perceived as riskier due to their shallower management teams and limited customer bases.
“It's making life much more difficult for companies,” Mr. Morris said.
The Federal Reserve Bank of Cleveland is seeing the same thing. According to its July 23 Beige Book publication, the Cleveland Fed said: “Bankers told us that lending standards are very tight and will remain so for the foreseeable future.”
Boyd Pethel, managing director for commercial banking and a senior vice president at National City Bank, said banks are cognizant of the strength of their loan-loss reserve levels — the money that banks keep on hand to deal with loans that aren't repaid. That awareness leads them to keep more cash available.
Mr. Pethel said the environment to provide credit to worthy companies is as competitive as ever.
As banks are more wary of lending, though, they are looking for fuller relationships, such as checking and deposit accounts, with the parties to which they're willing to give money.
“Having a value-added partner has never been more meaningful than it is today,” Mr. Pethel said.
Where banks fear to tread
The tightening credit market counters what had been particularly lax lending practices of the past few years, said Shawn Riley, head of the business restructuring services department at law firm McDonald Hopkins.
Mr. Riley said Ohio institutions also don't have as much capital ready to lend as they address problems with their own balance sheets.
But that situation paves the way for other lenders to come into the picture.
One is On Deck Capital, a year-old company that provides businesses with loans of $100,000 or less, to be paid back within a year.
Mitch Jacobs, the company's CEO, said On Deck is appealing to business owners because its money is easier to come by and takes less time to receive.
However, the availability of that money comes at a cost: Pricing on the loans is between 18% and 36% interest.
Mike Toth, senior vice president of business banking for Key Bank, said business borrowers there can generally expect to pay less. Interest rates are typically tied to the prime rate, which is now 5%. Loans with interest rates four or five percentage points above prime tend to be on the high end, at Key Bank and others, Mr. Toth said. At Charter One Bank, interest rates can be as high as six percentage points above prime.
On Deck's fees are higher in part because it doesn't do as much credit verification work as banks as it looks to speed the lending process, Mr. Jacobs said.
“The pricing picks up just where a bank lets off,” Mr. Jacobs said. “We're looking at the business a different way, verifying that customers are coming through the doors, that they're buying products.”
Some losses are anticipated, according to Mr. Jacobs, who said the losses the company has experienced are within its expectations.
On Deck achieves its one-year repayment requirements by deducting money from a company's bank account each work day, he said.
Central Command's Mr. Peer said he found On Deck online after looking for an option other than his own bank, which he said was a “huge hassle” because of the months-long lead time needed to secure a bank loan.
“Banks are always a good resource, but it didn't work for us for a number of reasons,” Mr. Peer said. “It's pretty tight lending (at banks). It's actually like they don't want to lend to you, it feels like.”
The need for speed
Scott Janke, whose wife, Angela, owns Home Accents and More in Sheffield Village, said the money she secured from On Deck will finance the production and distribution of a consumer catalog. He said the 36-hour turnaround time to receive the money, and the short repayment period, factored into the couple's decision to take out the loan.
“I think she would do it again,” Mr. Janke said. “She doesn't want to put her life on the line for five years, 10 years for a business loan.”
That sort of reaction to alternative financing options may force banks to work hard to attract the customers to which they do want to lend, said Mike Gaudiani, managing partner of Danville Partners, a business development company that uses private equity to build companies.
Yet despite the competition, banks are likely to scrutinize companies more closely now than they had in the past, Mr. Gaudiani said. Loans are available to good clients with good opportunities, he said, but not for everyone seeking funds.
“I don't think the spigots have turned off and we're in a deep, dark place,” Mr. Gaudiani said.
But, he added, “Banks are much more prudent with the moves they're making. They're flying at a much lower altitude. There's a chance they're scraping the treetops.”
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