There was a time when, if a successful small-business owner needed capital, he or she would simply meet with the manager of a local bank, and odds were excellent the funds would be forthcoming with little fuss.
Today, sparked in part by the mortgage crisis and a rising number of bankruptcies, lending institutions are demanding a lot more from small-business owners in need of cash, one of several critical changes in the economic climate revealed by recent national surveys.
“It’s much more difficult to get small business loans than it used to be. It is a much more formal process than it was previously,” said Kelly Driscoll, 30, who in 2002 established Digication Inc., an e-portfolio education-software company for kindergarten through higher education in Providence.
“You used to be able to go in and talk to a banker, but there’s a lot more information they need about your company now, and they all have formal applications you have to fill out.”
She has been relying on a line of credit from American Express “to give us flexibility,” she said. “When you’re trying to grow, having access to that type of funding is important.”
More than half (55 percent) of business owners surveyed by the National Small Business Association (NSBA) said they have faced difficulty securing credit over the last year. America’s smallest companies fare the worst, with 35 percent of those with four or fewer employees unable to get the financing they need, the survey said.
“We have seen banks become much more conservative in their lending. And in response to federal regulators, they are tightening up on companies that have not been doing well, which creates a downward spiral of problems,” said Grafton H. “Cap” Willey IV, director of the Rhode Island offices of Tofias PC, an accounting and consulting firm. Willey was chairman of the NSBA in 2007 and remains chairman of the Rhode Island chapter of the Small Business Association of New England (SBANE).
He urged federal officials in Washington, D.C., to resolve the credit crunch. “Federal regulations put pressure on the banks and the banks have cut back in response,” Willey said. “We have to make sure the banks are doing a good job on lending. The banking and financing industry cannot be allowed to contract too quickly.”
One reason for the credit crunch, Willey said, is because the Bush “administration has done its best to torpedo the Small Business Administration (SBA). They’ve cut back funding and in many cases they would just as soon see the SBA disappear.”
Of the 500 small and mid-sized business owners surveyed in late February by the NSBA via the Internet, 54 percent have some type of business loan, for which they leveraged credit cards, personal savings and their homes as primary sources. Forty-four percent used a credit card in the previous 12 months to help finance capital needs, with America’s smallest businesses most reliant on credit cards, the survey said.
A survey conducted for the American Express Spring 2008 Small Business Monitor, which unlike the NSBA poll, breaks down results by geographic region, found that 62 percent of small -business owners in the Northeast expect to face cash-flow problems, an increase from 50 percent a year ago. One-third of Northeast entrepreneurs report their accounts receivable are too high, triple the 11 percent logged a year ago. The Northeast region in this survey included New England, New York, New Jersey and Pennsylvania. Some 627 small -business owners were surveyed via telephone in August 2007.
To improve cash flow, the American Express survey said, 26 percent of Northeast business owners are most likely to get aggressive in collecting accounts receivable, with 24 percent likely to raise prices, 14 percent giving customer discounts for early payment, 10 percent offering special payment terms. Only 5 percent would use a credit card to improve cash flow.
Willey said he sees nothing necessarily wrong with small-business owners using credit cards, “if you can control it” and if interest rates are not too high, because the overall cost can be less than bank fees on a formal loan.
Christine Cunneen, 39, in 2005 founded Hire Image LLC, which conducts pre-employment screening. She began using an American Express line of credit when a fire forced her business out of its Johnston home several months ago.
“Because of the fire, I started tapping into the line of credit,” she said. “Lucky for me, I had it as a safety net.” Temporarily located in North Providence, her business should be back in Johnston by the first of the year. She owns the fire-damaged building, which was insured.
Driscoll and Cunneen are each optimistic about the fate of their own businesses, a sentiment reflected in the surveys. Seventy percent of all small-business owners said they are confident in the future of their own businesses, according to the NSBA survey, an 11-percent drop from the year before. Fewer than one out of four companies expect to hire more employees in the next 12 months, the NSBA national poll said.
In the Northeast, according to the American Express survey, 26 percent of small-business owners expect their businesses to grow regardless of the economy, compared with 41 percent in the South, 28 percent in the North Central and 44 percent in the West. Some 34 percent of Northeast small businesses expect to hire more workers.
Both Driscoll and Cunneen said they will be adding employees.
With nine workers at Digication, four of whom came on board last year, Driscoll intends to hire at least one more worker in the fall and two more at the beginning of 2009. (Last summer, the company welcomed its 1,000th client. READ MORE)
Cunneen at Hire Image has three full-time employees and is looking to hire two more. She has expanded her services to include not only pre-screening for employers, but also for landlords seeking reliable tenants.
The national survey found that most small-business owners have a dismal view of the economy. Seven out of 10 business owners, or 71 percent, say the economy is worse today than five years ago, with 45 percent expecting a recession.
“I wouldn’t say it’s dismal,” Driscoll said. “It’s incredibly challenging. You have to be creative in how you’re pulling in funding and conservative in your spending, but that’s reality today.”
“I’m optimistic,” Cunneen said. “We’re going through a major slump, but we’re going to bounce back eventually.”
Willey, a longtime small-business advocate, says most owners are resilient.
“A lot of businesspeople have been through these slumps before,” he said. “They know how to stretch a dollar and often can respond more quickly than larger businesses to changes in the economy. I have absolute faith in the small-business community’s ability to respond.” •
