Last September, Centennial Bank announced that the U.S. Treasury Department had granted it $1.8 million through the Small Business Lending Fund (SBLF). Jim Basey, Centennial chairman and CEO, says the Greenwood, Colorado-based bank was glad to take the capital, for several reasons. It came with a low interest rate (1% at press time) and few restrictions, other than confining loans to businesses with fewer than 500 employees and capping loan amounts at $2 million.
The recently recapitalized bank has been growing, with $70 million in business loans outstanding and an acquisition underway. But has the federal booster-shot led to any loans Centennial wouldn’t have made otherwise?
“No,” says Basey, without missing a beat. “We do the same credit screen on everything; we have to make sure every loan is done prudently.” In fact, the bank places a great emphasis on relationships, so “if someone walked through the door whom we didn’t know, we’d be pretty skeptical.”
Over the past three years, getting capital into the hands of smaller businesses — a universe that can encompass almost any company not traded on a major stock exchange — has become a cause du jour for politicians, researchers, celebrities, and even, well, big businesses. (Starbucks, for one, is collecting donations from customers to fund microloans to entrepreneurs.) The federal government has launched multiple efforts to stimulate the process, including the $30 billion SBLF aimed at banks and the $1.5 billion State Small Business Credit Initiative aimed at local development agencies, all of which is intended to be lent out in conjunction with private capital.
Yet nothing seems to be helping — so far. Experts caution that it’s still early to assess the results of the federal boosters, many of which have only recently left government coffers. Yet the outflow into the marketplace seems to be weak, for reasons that have virtually nothing to do with the availability of capital. “Quite honestly, I don’t think banks want to lend right now,” says Lawrence Manson, CEO of Nexgen Capital Partners, which advises banks on their investments. “You can have all the programs in the world, but it’s not the cost of capital that is constraining [banks]. It’s the inability of people to get comfortable with where the economy is going.”
Michael Eldredge, CFO of the $16 million sensor company AST Technologies, might agree that it’s all about confidence. His company recently received $5 million from PNC Bank on very favorable terms, but it didn’t come easy, despite the fact that AST has seen revenue increase by more than 30% and EBITDA grow by more than 80% in the past year. Eldredge spent a year working with bankers to secure a $2.5 million, five-year loan and a $2.5 million revolver. Thanks to a positive audit, the bank agreed not to tether the revolver to the state of payables and inventory, but the company will report on those monthly to the bank. And there are personal guarantees attached to the loans that will likely be removed in about a year pending favorable 2012 financials.
In the end, things worked out well for AST, but Eldredge doesn’t believe the spate of new programs had anything to do with it. “While there is more money out there,” he says, “we either don’t fit [many] banks’ profiles, or the rules remain problematic and archaic and ultimately prevent banks from lending their money. But if you can demonstrate a history of meeting or exceeding your goals, that gives bankers a comfort level that you’ll do what you say you’re going to do.” Also key, he adds, is developing a personal comfort factor with your bankers. “You have to form business relationships,” Eldredge says. “We’ve worked with some of the people at our bank for years.”
Banks unquestionably have money, and some companies are getting it, but what does that mean for small businesses in the current credit market? Here we survey the banking landscape for smaller companies, including assessments of what banks are doing to help and where some of the recently launched programs designed to improve the climate stand.