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Tracy Frank, Published February 01 2010

Small businesses struggle to find enough financing

Jerry Stromberg’s long-standing dream of owning his own business became a nightmare last summer.

He had to close Ristreto Coffee & Tea after five years in business in Fargo when several factors, including problems securing enough bank loans, combined to force closure of his shop in July.

Small-business financing is the predominant issue Daniel Hannaher, former Fargo businessman and current regional administrator for the U.S. Small Business Administration based in Denver, deals with every day.

Hannaher said he hears from small businesses across his region, which includes North and South Dakota, Wyoming, Montana, Colorado and Utah, seeking financial support.

“They feel that they have had worthy credit and they have had profitable business in the past, but due to the current economic circumstances, it’s just difficult to find loan dollars available,” Hannaher said.

Stromberg went to four different banks. Only one could help him but could not provide as much money as he needed. When he moved his coffee shop from its original 13th Avenue location to 40th Avenue to accommodate a drive-through lane and better accessibility, he ended up paying more out of pocket than expected, he said.

“We had no room for error at that point,” Stromberg said.

Then came a triple whammy. A weak economy combined with a frigid winter followed by massive spring flooding resulted in fewer customers. Stromberg tried to sell the restaurant. There were interested parties, but they could not get the financing they needed.

The landlord bought the business’s assets, but the shop still sits empty.

“It was frustrating that the federal government had all these programs to bail out these multi-national corporations,” Stromberg said. “The idea was, especially with the banks, that the money was supposed to trickle back down to us, and it never happened.”

Deb Sizemore, a Realtor with Advantage Realtors, tried selling Ristreto and is also listing Café Chocolat in Fargo. She said she’s surprised neither has sold, especially considering she had two full-priced offers for Luna Coffee when it sold in early 2009.

“It just doesn’t happen on a dream anymore. Even if you have excellent credit, if you don’t have the collateral or the cash, I don’t think you’re going to get it (financing),” she said.

Higher hurdles

The Federal Reserve Bank of Minneapolis polled businesses across its district, which includes Montana, North and South Dakota, Minnesota, northwestern Wisconsin, and the upper peninsula of Michigan, in three separate surveys in October and November.

Between 25 and 43 percent said their access to credit deteriorated in the previous three months. That’s up from 20 to 35 percent who said the same thing the previous year.

“This suggests credit conditions remain tight heading into 2010, which will continue to have an impact on hiring and investment,” said Toby Madden, regional economist with the Federal Reserve Bank in Minneapolis.

But those in the local banking industry say owning a small business today isn’t an impossible dream.

Michael Solberg, president and COO of State Bank & Trust, said most Fargo-Moorhead banks would like to see more loan requests. If a small business has a strong plan, there are banks that will finance it, he said.

“Because of the fact that we haven’t been as adversely affected here by the economy or by the banking crisis, banks are still trying to lend,” he said.

Brian Hagen, president and CEO of Bremer Bank’s Fargo-Moorhead area chapter, said regulations and underwriting criteria have become a lot tighter, but clients who continue to show a profit and work through their challenges will be able to find financing. If a business’ sales are down substantially, they won’t qualify for as much, he said.

“We can’t keep putting the burden on the financial institutions and blaming them for the economic issues,” Hagen said. “It’s easy to say the banks aren’t lending, that’s why we’re in a crisis.”

Bill Blazar, Minnesota Chamber of Commerce senior vice president, said the hurdles small businesses have to jump now to obtain financing appear to be higher.

“With or without the crisis in the financial sector, the economy is sluggish and there is some uncertainty, so it’s not surprising that the lenders would be a little bit more cautious,” he said.

In 2009, the Minnesota Chamber received a $5.5 million grant from the Carl and Eloise Pohlad Family Foundation for small-business loans and grants.

Its first round of funding provided $4.5 million. The chamber received 752 applications requesting $73 million. In the second round, the chamber had

$1 million to loan and received 181 applications totaling $11.2 million.

“Most of these businesses are perfectly viable,” Blazar said. “Business has suffered because of the weak economy.”

To apply, businesses had to show they had been rejected by a Minnesota financial institution. The chamber was able to work with 90 companies in 62 Minnesota communities.

In North Dakota, borrowers don’t seem to be struggling as much as in other parts of the country.

Overall, bank liquidity is pretty strong but they have tightened loan requirements, said Dave MacIver, North Dakota Chamber of Commerce president.

Acquiring financing is more difficult in rural areas, he said.

“Money is definitely not as easy to get as it was,” MacIver said. “But, overall, I think we’re doing just fine.”

The state-owned Bank of North Dakota has several programs to help small-business owners secure lending through a bank. BND enables banks to provide more credit to their customers and reduces banks’ risk by taking on a portion of the loan, said Eric Hardmeyer, Bank of North Dakota president.

However, Hardmeyer said he has not seen a significant increase in people applying for the programs.

“We’ve been very fortunate in North Dakota in that the banks generally are very healthy here and are continuing to lend,” he said. “Maybe not at levels that we’ve seen in 2004, 2005, but there certainly hasn’t been any retrenchment that others have seen around the country.”

North Dakota businesses are in a better position than businesses in most states, said Sen. Byron Dorgan, D-N.D. Small, profitable businesses from around the country wanting to expand could not secure necessary credit, Dorgan was told during a hearing he chaired in Washington.

“North Dakota banks have largely been in a different position than many of the national banks because they did not get involved in some of the reckless and risky activities that other banks did,” he said.

Rick Clayburgh, North Dakota Bankers Association president and CEO, likens what’s happened in the banking industry to the little brother who does nothing wrong, but gets in trouble because his siblings are acting up.

“It is frustrating for our banks to have to deal with all of the problems and all of the solutions to perceived problems that are impacting them, which in turn impacts how they can conduct business with their customers,” Clayburgh said.

Banks are dealing with more aggressive examiners, and regulators are asking them to be more cautious.

They’re also told to keep more money in reserve to prepare for losses and were required to prepay three years of insurance premiums following last year’s failure of 100 banks nationwide, which depleted potential loan dollars, Clayburgh said.

Securing a loan

The Small Business Administration received $375 million in the American Recovery and Reinvestment Act of 2009 to guarantee bank loans and waive fees for small businesses.

Since the passage of the act in February, the SBA, which does not make loans, but guarantees loans for small businesses, has supported 42,300 loans totaling just under $17 billion, Hannaher said.

“That’s not to say that we don’t have a long way to go yet,” he said. “There are a lot of people needing a good lender package in order to continue their business.”

Minnesota leads the nation with 553 recovery act loans totaling $18,289,000. North Dakota’s loans total more than $77 million.

In December, Congress provided another $125 million to the SBA to continue a program to guarantee loans up to 90 percent and waive lending fees.

“Small businesses have created 64 percent of private jobs in the country over the last 15 years and so we’ve got to find ways to encourage this entrepreneurship to continue and flourish,” Hannaher said.

Businesses struggling to access capital may need to look at the fundamentals of their business plans, which the SBA can help them do, Hannaher said.

Stromberg said he had a solid business plan and he had talked to other business owners in town who felt he had the right business model.

“Being a competitor, I made sure that I was able to have some differentiation that made it worth a bank’s while,” he said.

While he eventually found one that did, he just couldn’t get enough to prepare for the unexpected.

“I’m not bitter about it,” Stomberg said. “That’s business, you have to be able to step up or get out of the way. We certainly stepped up, but when we tried to get out of the way, we weren’t able to do that either.”

Key sources of capital include:

  • Owner’s resources or savings

  • Friends and relatives

  • Banks and non-bank lenders

  • Angel investors and venture capital firms

    Things to know upfront about borrowing money:

  • There is no such thing as 100 percent financing.

  • There are no government grants to help start a for-profit business.

  • The Small Business Administration does not lend money. The SBA helps guarantee loans.

  • Credit history is important.

  • A lender will most likely require a personal guarantee.

    Source: www.sba.gov

    Readers can reach Forum reporter Tracy Frank at (701) 241-5526