Local financial institutions are between a rock and a hard place. Many local businesses are under the rock.
"The Treasury, Federal Reserve and Federal Deposit Insurance Corp. are saying they want banks lending money," said John Collins, president and executive director of Community Bankers of Washington. "But bank examiners tell us to increase our capital position. We can't do both."
Darryl Horowitz, president of Vancouver-based National Investment Finance Corp., said there is a total disconnect between what Congress is saying and what the government is really doing.
"Because of regulatory scrutiny, the stimulus domino effect hasn't started yet," said Roger Michaelis, president and chief executive officer of Vancouver-based iQ Credit Union.
This isn't news to local business owners, such as Eric Braunwart, president of Vancouver-based Columbia Gem House Inc.
One of the hundreds of businesses stranded when Bank of Clark County was seized by the FDIC in January, Braunwart has been unsuccessfully searching for a replacement line of credit.
"We have financed our company for 30 years and have never seen anything like this," said Braunwart, who added that bankers have told him only about 11 percent of loan applications are now approved, compared to about 75 percent previously.
Braunwart's outspokenness was unusual in the business community – several business owners whose lines of credit are up for renewal, or who are looking for new loans, were reluctant to speak on the record for fear of alienating banking management.
According to the National Small Business Association,
55 percent of small- and medium-sized businesses recently reported difficulty in getting credit, and about 30 percent said banks have reduced their credit lines.
Retail, auto dealerships and commercial real estate are some of the hardest hit sectors, while health care seems to be immune.
No help from the acronyms
"The Small Business Administration is no white knight," Braunwart said, referring to the SBA's relatively low numbers of loans issued so far this year.
Dennis Lloyd, is lead lender relations specialist for the SBA's Portland District Office. Although SBA lending is usually counter-cyclical, increasing during economic downturns, "other issues have prevented
that from happening this time," such as the virtual disappearance of the secondary loan market,
he said.
In 2007, the SBA made 96 loans in Clark County worth $21.2 million, Lloyd said. In 2008, 97 loans worth $20 million were made. But during the same period this year, the SBA made only 45 loans worth $9.3 million.
And just because a bank has received Troubled Asset Relief Program funds, doesn't mean it's chomping at the bit to make or keep loans.
Take Tom Grace who, in addition to owning Grace Premier Fitness and Wellness Products and the Grace Physical Training Institute, both of Vancouver, partnered with Ben Sheldon on buying and developing an acre of commercial property near Mill Plain and MacArtur boulevards. They bought the land about three years ago with the help of an interest-only loan from Wells Fargo. The property was appraised at $1.1 million, and rent from the tenants covered the loan payments.
Despite three years of on-time payments, Grace said, Wells Fargo said unless they refinanced to a conventional loan – and put up $250,000 cash – they needed to "take it somewhere else."
It took "six months of hell" and $20,000, Grace said, to secure a new loan from iQ and they were only five days away from Wells Fargo calling it a bad loan.
Not only that, but the project – which was all but shovel ready – is now delayed for a year to a year and half.
"I can't figure out why Wells Fargo didn't want that loan," Grace said. "The local Wells Fargo guy was good – the decision was made higher."
Wells Fargo Spokesman Tom Unger said the bank makes its loan decisions locally as a team, and "If a business owner comes to us with a sound request, we'll make the loan – assuming there is cash flow and collateral to support the debt."
Not all doom and gloom
Lani Hayward, executive vice president of creative strategies at Roseburg, Ore.-based Umpqua Bank, said the bank made
$18 million worth of loans in the Vancouver area in the first quarter, while iQ lent $12 million with expectations to lend about
$30 million by year-end,
Michaelis said.
"If you have a good business model, banks are willing to lend," said Scott Conley, president of Vancouver-based Essential Building Technologies.
Don Holsinger has two commercial property loans at iQ, and offered the following advice: "Make every effort to deal with local banks, go in prepared and if the project isn't viable, don't waste time on it."
Michaelis said financial institutions are not so much transaction-oriented now, but rather relationship oriented. In other words, they don't want to just make a loan – they want deposits and other accounts.
"Long-term members get first priority," Michaelis said.
Looking forward
An April survey of loan officers by the Federal Reserve found that in commercial lending, 40 percent of the 53 domestic banks surveyed said they tightened standards on commercial and industrial loans, compared to 65 percent in a January survey.
The Federal Reserve said this was the first time since January 2008 that the proportion of banks reporting such tightening fell below 50 percent.
Similarly, about 65 percent of banks said they tightened standards for commercial real estate loans, down from 80 percent in January, the first time since October 2007 that the percentage of banks tightening standards on commercial real estate loans fell below 70 percent.
Newt Rumble, vice president of Vancouver-based accounting firm Peterson and Assoc. PS, foresees the following trends in small business lending:
- Banks will be very numbers-driven. They want to see a
good loan-to-value ratio, strong cash position and decent
profit margins.
- Banks will pay more attention to loan covenants such as
cash withdrawals, salary increases, management changes
and changes to product lines.
- Banks will add depth to loan guarantees, requiring even
2 to 5 percent owners to sign on to a contract (until now, anyone with less than a 20 percent ownership didn't
have to sign).
- Loan pricing structures will change. Banks will use indexes other than simply "prime +."
"Banks are going to be a lot more interested in your operations now than in the past," Rumble said. "Make your banker your partner, just like your CPA, attorney and insurance agent."
Fiscal Year to date: Oct. 1, 2008 – April 30, 2009
7(a) Loans
FY Total # of Loans Total Value of Loans Average Loan
2009 412 $68,208,200 $165,554
2008 1,143 $211,012,990 $184,613
2007 1,575 $171,440,557 $108,851
2006 1,246 $174,269,516 $139,863
