Getting Approved For A Loan Isn't As Easy As It Used To Be

Getting approved for a loan isn’t as easy as it used to be. You actually have to prove you have a job these days before getting a $1 million loan.

For a time not that long ago you could have walked into a lender’s office without an income, job or assets and walk out approved for a nice chunk of money. Of course, that’s all changed today and that’s not a bad thing because getting a $100,000 loan should require more paperwork than adopting a dog.

But the new lending standards, which have gone from an easy extreme to a much more difficult one, have left small businesses stranded at a time when they need loans the most.

The tougher conditions are creating a dangerous cycle and have resulted in an ugly blame game between lenders, small businesses and regulators. Thursday on Capitol Hill, the Office of Advocacy for the for the U.S. Small Business Administration hosted a symposium for those groups to address their gripes with one another. All three groups acknowledged the credit crunch that small businesses are faced with but finding a solution to that problem wasn’t so easy.

Small business owners say they need capital now more than ever but can’t manage to squeeze a dime out of many banks. Banks meanwhile say there is not enough demand from quality borrowers and that approving loans is more difficult because regulators are demanding that they be stricter. Regulators say they’re asking banks to make rationale decisions about the loans they approve, and to approve where appropriate.

Here’s how Traci Mach, an economist at the Federal Reserve Board explained the small business credit crunch situation:

weaker loan demand because of the economic slowdown noting a survey that found just 20% of businesses say they planned to borrow money in the next 3 to 6 months for those small businesses in need of a loan they have seen their personal assets diminish in value (homes, real estate) and have less to put as collateral for bank loans banks are looking for strong financials from small businesses before they approve loans. But James Chessen, chief economist for the American Bankers Association (who was brave enough to sit before a room full of small business owners) wants small business owners to remember that his banks are at the mercy of the Fed and other regulators.

Regulators, he says, tell banks they need to look at the last three years of a business’s earnings and tax returns to determine whether the loan should. But the last three year’s of anyone’s earnings haven’t been pretty. (Well, unless you were a bank in 2009 but who’s asking?)

“Small businesses are being asked more of banks and banks are being asked more of regulators. The attitude we’re getting from regulators is: Make no mistake in your lending,” Chessen says.

More finger-pointing from Chessen, “Imagine if more than half of your staff had to be dedicated to figuring out new regulations.”

He added, “The joke these days is that no matter what your capital levels are the regulators want 2% more of what you have. And the easiest way to deal with stricter regulations is to shed assets. Today your local bank might be interested in lending to a start-up business but tomorrow it will be less inclined because carrying that kind of loan increases its risk.

Chessen’s best defense came when he pointed out that most banks themselves are small business. The median bank in the U.S. employs 41 people. The ABA’s smallest member employs 2. “They get what small business is all about,” Chessen told the audience adding that those small banks are being burdened with same new regulations that, say, a large bank like Bank of America is dealing with.

Some small business owners in the audience said they were fed up with big banks in particular because those there the institutions least likely to consider their individual situations. One small business owner I spoke with said he had better luck getting his loan approved by local credit union in suburban Maryland after being denied by two big banks.

Even venture capital funding has tightened up dramatically. Since the financial crisis, the number of deals and the amount of dollars on the VC front is down by 30%, according to the SBA. “It’s not that there is a shortage of great small businesses or ideas that’s restricting venture capital but the exit is tougher today. If we can’t monetize our investment then we’re stuck,” explains Daphne Dufresne, managing director with RLJ Equity Partners of Bethesda, MD.

If exits are so difficult why not monetize in secondary or OTC markets? “After 7 or 10 year investments, we want a major event. VCs want the New York Stock Exchange or the NASDAQ,” explained Mark Heesen, president of the National Venture Capital Association.

So what’s a small business owner to do? Sit tight? That’s tough advice for entrepreneurs wondering if they can make payroll next week. Banks need to start lending again, and Mach had evidence that shows they might be warming up to it. But many small business owners I spoke with yesterday didn’t seem to have time on their side. Some of the entrepreneurs I spoke with at yesterday’s symposium had all but given up. They were bruised, battered and battle-scarred.

“One year is a statistic to an economist. But for a small business owner it’s 365 days of waking up and running your business and if things aren’t going well it can take years off your life,” commented Winslow Sargeant, PhD and chief counsel for the Office of Advocacy.

September 16, 2011
Halah Touryalai, Forbes Staff
Forbes Magazine

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