THE LENDING DROUGHT: Struggle to get loans hurts small business

RUCKERSVILLE—After nearly a decade in business, a great credit rating, debt-free inventory and top-notch credit scores, Blue Ridge Trailer Sales is having trouble getting a loan as finance companies pull out of the small business credit market and federal regulators increase scrutiny of local banks.

“We can’t find anyone to finance additional inventory at a time when people are knocking at the door to purchase trailers,” said Donna Martin, sitting behind her desk in the Greene County facility that she and her husband, Rob, own.

“The long and the short of it is that we are a highly credit-worthy and successful small business that employs eight people — six of whom are primary breadwinners — and we can’t get financing for spring inventory,” Martin said. “Without adding inventory we do not stand a chance of being profitable.”

It may be little condolence to the Martins, but the lack of loans is nothing personal. It’s just business in the fear-and-loathing atmosphere of today’s economy.

“There is no question as to whether there is a fund restriction in the commercial credit market. There is,” said Gregory Fairchild, associate professor of business administration at the Darden Graduate School of Business Administration at the University of Virginia.

The credit crunch comes as everyone from economists and pundits to President Barack Obama and conservative Sarah Palin say increased lending to small business is key to creating jobs and getting out of recession.

“The story you hear from small business is that ‘I’m out there doing a good business, my credit is still good, but I can’t get loans now.’ That’s, in fact, what’s happening,” Fairchild said.

Blue Ridge Trailer Sales’ financing woes began shortly after the current recession. In February 2008, their long-time inventory financier pulled out of the market and required clients to pay off whatever money was outstanding by February 2009.

The company’s inventory includes utility trailers, landscaper’s trailers and horse trailers from the functional to the comfortable. The trailers vary in price from less than $1,000 to more than $25,000.

In June 2008, the company’s back-up finance company pulled out of the market, except for trailers made by three manufacturers, none of which Blue Ridge carries.

In June 2009, American Express took away the company’s “corporate gold cold” with an unlimited credit line and issued in its stead a “business gold card” with a $1,500 credit limit, although Martin said the company was always on time with payments. No one from American Express would comment.

In the spring of 2009, the finance company that once financed purchases for the business’ customers pulled out of the market.

In the fall of 2009, lenders serving the horse trailer market announced all down payments on financed purchases had to be at least 20 percent.

Fairchild said many new banking regulations are the result of 2009’s record bank failures and increased supervision by the Federal Deposit Insurance Corporation, which covers accountholders when banks go under.

In 2008, 25 banks failed across the country. In 2009, more than 133 banks failed.

So far in 2010, 26 banks have gone under.

With the FDIC looking over their shoulders, smaller banks face tighter restrictions on loans at the time when larger banks are seeking profits by providing fewer loans for larger amounts to larger companies rather than more loans for less money to smaller businesses.

“As a bank, I can’t just sit pat on my deposits. I make a profit by loaning money and having it paid back with interest. But I might say, I’m only going to loan to people who have very little risk, and big businesses tend to be better risks than smaller businesses,” Fairchild said.

“If I loan 10 small companies 10 loans and one goes sour, a few years ago I used to be able to absorb that, but now things have gotten so bad that one loan in 10 could put me under,” Fairchild said. “The FDIC, having covered all of the losses in 2009, says we’re going to be very careful and make sure all of these loans are as good as they can be so all of the deposits are protected.”

Jane Henderson is president of Virginia Commun-ity Credit, a multimillion-dollar, nonprofit community development financial institution that provides loans for affordable housing and economic development projects. She said businesses facing credit crunches similar to Blue Ridge Trailer Sales should develop relationships with local banks.

“Big banks base their decisions on credit scoring and other techniques and they have pulled back from small business lending in a major way,” she said. “Smaller banks know their local markets better, they know what businesses are likely to thrive and survive and they’re interested in doing business in a variety of accounts.”

Henderson said businesses should review their plans and create a plan B. They may consider putting up their homes as collateral.

“Pledging personal assets may not be something you want to do, but it may be what you need to do to survive in a down economy,” Henderson said. “Bankers sometimes get a bad rap, but the last thing they want to do is take collateral. They want a healthy, thriving business.”

The Martins had already followed Hender-son’s advice, cultivating a relationship with North Garden’s Old Dominion National Bank. FDIC regulators, however, required the bank to reduce the company’s operating credit line by $50,000 to reduce risk exposure.

In December, federal regulators turned down the Martins’ request for a Small Business Adminis-tration loan through Old Dominion National because the small bank did not have a full-time employee to administer “floor plan” credit lines.

Since then, the bank has been working with the Martins to secure credit from other institutions.

“That’s part of our job as a community bank,” said Charles V. Darnell, Old Dominion’s president. “We’ve worked with them for a long time and know the business so, if we can’t do the financing, we’ll try to find someone who can.”

Darnell said local banks face an ever-changing array of federal guidelines and regulations, many of which are designed to answer problems that face community banks in other states.

“What we might consider to be credit-worthy, trustworthy people aren’t strong enough credit-wise to meet some of the requirements of regulators,” he said. “They are making decisions that are based on small banks in other states that have very different economic environments than ours.”

Martin says the experience of her company bodes ill for other small businesses.

“I’m going to do everything I can to put inventory on our lot and meet the pent-up demand that’s out there, but without financing, I don’t know what we can do,” Martin said. “We’re a credit-worthy, healthy business and there are a lot of others like us out there that can’t get financing. If this trend continues, I think we’re going to see a tremendous number of businesses shutting their doors.”