Credit-hungry firms have options
The Contos family knows the bitter taste of the credit crunch.
Plans were drawn up for the third of their Golden Star Family Restaurants on land the family had owned for years. Then their longtime bankers turned down the Contoses’ request for a $1.5-million loan, offering much less than they needed despite their good credit record.
“We thought it was a sure thing,” said Aristi Contos, whose father, Dimitrios “Jimmy” Contos, opened the family’s first Long Beach eatery in 1963 after immigrating to Southern California from Greece.
Like many small-business owners, the Contos family has learned a tough lesson: In today’s credit markets, there are no sure things.
Some 72% of small-business owners seeking loans say it is harder to borrow money now, according to a September survey released by Discover Financial Services.
As banks struggle with their own credit problems, even business borrowers with good credit are finding that they may have to pay more for a commercial bank loan, that they are offered less money than they need or that they are shut out all together. Two popular sources of credit -- home equity loans and credit cards -- have been drying up for months.
“This is totally unprecedented, and no one knows where this will end,” said Chris Larsen, chief executive of Prosper Marketplace Inc., which runs the online lending site Prosper.com.
Cash almost always will be available from one source or another, but the cost to rent it may be too high to make sense. Increasingly, small-business owners who can’t wait out the credit squeeze are turning to alternative sources for the money they need
In August, the Contos family got $1.7 million from a federally guaranteed Small Business Administration loan. Here is a look at the SBA program and a handful of other options to consider.
SBA loans. This kind of loan is made by a bank, which receives a guarantee from the SBA that some of the money would be paid back by the U.S. government if the borrower were to default. The goal is to encourage banks to provide loans for small businesses that might not qualify for a standard commercial bank loan, which can be less expensive than SBA-backed loans.
The maximum amount is $4 million for the SBA’s fixed-asset loan, the so-called 504 program; and $2 million for the other main loan, the 7(a).
The Contos family went to Excel National Bank of Beverly Hills, which is bucking the trend for the time being by aggressively soliciting borrowers for its SBA loans.
“Because we are in the fortunate position of being able to make loans, we are just seeing a flood of applications,” said Brian Carlson, chief executive of the small bank.
SBA loans in the pipeline have almost tripled to $230 million, said Carlson, who has added 20 employees to handle the volume. About 75% of those loan requests will receive funding, the usual ratio even though credit standards are tighter, he said.
That’s not the case at many other local SBA lenders.
As the secondary market for the government-backed loans has cooled, the number of loans made in the SBA’s Los Angeles district, which includes Los Angeles, Ventura and Santa Barbara counties, dropped about 30% to 3,181 for the nine months ended June 30, the latest numbers available. District Director Alberto Alvarado expects a similar drop for the full fiscal year ended Sept. 30.
Check the SBA website, at www.sba.gov, for fees and interest rates for individual loan types, including those targeted at military veterans.
Despite a reputation for ponderous paperwork, the SBA loan process was so easy that Aristi Contos was suspicious at first. However, the new restaurant project is on hold for now because of the poor economy, Contos said, although she hopes to break ground next summer.
“We want to get off on the right foot,” said Contos, who has helped manage the family’s restaurants since she was in high school.
Micro loans. Several Southern California nonprofits offer small loans for small businesses or individuals who want to start a new business. Some of these also are backed by the federal government, such as the SBA micro loan, which offers borrowers up to $35,000.
The Valley Economic Development Center, www.vedc.org, is one source for that loan. The VEDC also manages a number of other loan funds, including one for revolving loans from $25,000 to $700,0000.
The Jewish Free Loan Assn., www.jfla.org, manages five little-known micro-enterprise funds. The Los Angeles group, part of an international network of interest-free loan agencies, got its start in 1904. It makes interest-free loans for as much as $15,000 for start-ups or existing small businesses.
Organizations such as SCORE, www.score.org; the Assn. of Women’s Business Centers, www.awbc.biz; and small-business development centers, www.asbdc-us.org, are sources to learn more about financing your small business.
Person-to-person online loans. These are new options based on an old concept: a group of individuals lending to one another increases the likelihood loans will be repaid.
It worked out well for Jason Dike, who owns Airsoft Advantage in Fullerton, a store and an e-commerce site devoted to the paintball-like combat game Airsoft. Dike had already received a $12,000 loan at 17% interest from Citibank, he said, but wanted to try his luck on a better rate at Prosper.com, a peer-to-peer lending site.
At Prosper, borrowers’ applications include the interest rate they want to pay, which can reach as much as 35% for the poorest credit risks. Others in the business include Zopa, Virgin Money USA and Lending Club.
Bidding for portions of his loan, Dike said, drove the interest rate down to 11% from his initial offer of 17%. The money was needed to fund a new product -- a 6-millimeter BB made of biodegradable plastic. The BBs are used in the air guns that Dike sells to game enthusiasts who value the realistic look of the plastic Airsoft guns.
At Prosper.com, the number of loans funded rose 37% last month compared with September 2007. The average loan fell to $5,544 in September from $7,715 a year ago. So lenders -- who are purchasing parts of a loan made by WebBank, a Utah-chartered industrial bank, via Prosper -- were making more but smaller loans.
The site has seen an upward shift in the credit quality of its borrowers since it launched in 2006, said Larsen, who helped create Prosper. Prime borrowers, who are those with credit scores of 720 or higher, accounted for 45% of loans made in September, up from 30% in September last year and just 21% in September 2006.
Meanwhile, subprime borrowers, those with credit scores below 600, accounted for 5% of loans as of last month, compared with 8% a year earlier and 25% in September 2006.
Prosper loans range from $1,000 to $25,000. Borrowers pay a 2% to 3% fee, which was recently raised, and are charged a fixed interest rate. Lenders also pay an annual fee to Prosper. Larsen advises small-business owners that it’s easier to persuade strangers to lend if family and friends already have chipped in.
Factoring. Small-business owners looking to improve cash flow could consider selling their invoices to a finance company known as a factor. The factor doesn’t pay full value, but the business owner gets the cash right away rather than waiting for a customer to pay.
It’s been a common strategy in the apparel business for years and has now spread to a variety of businesses. Terms can vary widely, so do your research, ask for references, read the fine print and carefully compare offers.
Retirement accounts. Despite admonishments to never touch a retirement account, especially a 401(k), some small-business owners find it a useful tool to fund their operations.
Sharon and Mark Noneman recently opened the Taste of Wine shop in Tualatin, Ore., and to fund the start-up they tapped his 401(k) account for nearly $50,000. But instead of withdrawing money, which triggers taxes and penalties, the Nonemans borrowed from the retirement account.
“We weighed the options and decided it was the best course,” said Sharon Noneman, who employs six people.
Noneman, a former human resources executive, set up a 401(k) at her small business through ShareBuilder 401k of Bellevue, Wash., a subsidiary of ING Direct.
ShareBuilder has sold 2,500 plans so far, targeting smaller firms that typically don’t consider a 401(k) an option.
General Manager Stuart Robertson says some small-business owners are setting up the accounts, often rolled over from accounts at former employers or from an individual retirement account, just so they can access their cash for business use.
“They are loaning themselves money,” he said, and pay a $75 fee for the transaction.
That can be attractive for some small-business owners. The interest rate for his customers is prime rate plus 1% -- or 6% currently. The maximum loan allowed by the IRS is $50,000, although not every account holder will have enough qualified funds.
“You want to be sure you are on firm financial ground” before taking such a loan, Robertson cautioned. Failure to make regular payments or to repay a non-home loan within five years can trigger taxes and penalties. Someone in the 25% tax bracket, for instance, would owe 35% on the borrowed money.
Vendors. Large vendors may have formal credit plans for their customers, but it can’t hurt to approach your other suppliers about extending credit. Have a plan showing how the money will be repaid and be sure to address how your business plans to handle the ongoing financial uncertainty.
Credit unions. Most credit unions don’t yet offer business loans, although some are starting to participate in the SBA loan programs. This could be a good source for credit for qualified small-business owners.
To get a loan, the owner has to become a credit union member. Many credit unions limit membership based on where a person lives or works.
For worried owners, having access to credit -- even if they don’t use it -- can help ease fears that they are powerless in today’s troubled economy.
“We’ve been in business for so long and I’ve seen it bad several times before,” restaurateur Contos said. “But I think this one takes the cake because the economy is really, really affecting all facets, from housing to small business to stocks. It’s just really overwhelming.”
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