Loans, optimism scarce for most small businesses

December 3, 2012

For entrepreneur Maurice Lopes, the plight of today’s small business owner is epitomized by a cartoon that depicts a bunch of people staring through the window of a bank, while a policeman swings a club to try to get them to disperse.

Lopes said the punch line read: “What’s the matter? Never seen somebody get a loan before?”

All joking aside, Lopes confessed it’s not a pretty picture for startups and small firms trying to raise what he called “gap funding” of less than $500,000 in the current economy.

Earlier this year Lopes, a serial entrepreneur who also runs catering and dog-walking businesses, launched EarlyShares.com crowdfunding platform to try to fill the funding void. The site stemmed from his own frustration with being turned down for a $500,000 loan to expand his three-year-old Miami-area catering company – Kiddie Catering – because his bank needed him to show two years of consecutive profits.

“Banks are not lending to small businesses to start or expand,” said Lopes, whose catering business employs 25 people and is on track to pull in revenues of $400,000 this year. “A lot of commercial real estate transactions are getting SBA (Small Business Administration) loans, but not to small businesses for working capital.”

EarlyShares is similar to Kickstarter, but with one major difference. “We don’t have projects, we have companies,” said Lopes, who has signed up 1,500 small businesses and more than 30,000 investors since President Barrack Obama had the crowdfunding portion of his Jobs Act legislation approved last spring.

The Securities and Exchange Commission (SEC) still has to finalize the regulations around it, which Lopes expects to be done by the end of March. Until that time, Lopes said they are blocked by “a Chinese wall,” because his company is “not allowed to show general unaccredited investors investment opportunities.”

EarlyShares acts like a funding matchmaker, pairing companies seeking between $100,000 to $500,000 with investors, who can lend them as little as $100 in return for a 5 or 6 percent dividend.

For the purposes of getting more bang for their buck, Lopes encourages investors to spread the money around in small increments. “Don’t put $2,000 in one company, put $100 in 20 companies, because 50 percent of them might fail and you want to be able to have a return.”

While funding remains scarce at the lower levels, SBA lending for the top 13 U.S. banks grew by $11 billion from September 2011 to September 2012.

Wells Fargo & Company (NYSE:WFC), the country’s largest lender of SBA 7(a) loans, last month reported the bank topped the $1 billion total for the second-straight year – the first time it has ever done so.

While it acknowledged most of those loans were for “rent replacement” as small business owners borrowed money to buy the buildings that house their companies, Wells Fargo’s SBA lending head Dave Rader said the average loan size was $391,000.

Rader also said he’s seeing “savvy borrowers with better financial statements.”

However it’s not all roses. A new Wells Fargo poll showed small business owners are feeling extremely uncertain about the economy in the wake of the impending fiscal cliff and Obama’s election win, according to the bank’s head of small business lending Marc Bernstein.

“The striking change has occurred in the future expectations index, where we’ve seen the biggest decline in years,” admitted Bernstein. “That’s primarily related to people’s anxiety about the whole fiscal cliff issue and the uncertainty around Washington right now.”

The Wells Fargo/Gallup Small Business Index fell 28 points, from a positive reading of 17 to negative 11 in the post-election survey of 607 small business owners conducted November 12-16.

Bernstein said the survey results could also have been negatively impacted by the stock market slump that accompanied the election results, but described the quarter-to-quarter drop as “dramatic.”

One of the most concerning areas of the poll was in regards to the hiring expectations of small business owners over the next 12 months. About 20 percent of respondents said they intended to decrease the number of jobs at their companies in the next year – the largest percentage in the survey’s nine-year history.

Additionally, nearly 30 percent of business owners expect lower revenues in 2013, up 11 points from the prior reading and the highest percentage of small businesses expecting decreasing revenues since 2009.

Bernstein said if the debt-deal talks in Washington continue unresolved and fiscal fears spillover into the New Year, then Wells Fargo could start to see a reduction in the number of small business loans.

“If the decline in revenues occurs that people worried about in here, I would expect to see some poor performance.”

5 comments

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Huh-oh – 20% of small businesses will DECREASE their number of employees in 2013. And on top of that, even major corporations like Walmart – ESPECIALLY Walmart – will use more part-time employees in order to pay less in healthcare costs due to Obamacare.

Doesn’t look good for the employees of either small businesses or mega-corporations.

Posted by AZreb | Report as abusive

As long as banks continue to keep small businesses out in the (working capital-less) cold, our economy will continue to struggle. Perhaps optimism wouldn’t be so low if small businesses knew that they could access the working capital they need without the multiple rejections and unrealistic demands of traditional banking institutions. Alternative financing company EarlyShares.com is just one of hundreds of financing options that seek change the status quo of small business lending. (Disclaimer: I work for an invoice financing marketplace called The Receivables Exchange. We are not a factoring company.)

Posted by MariahC | Report as abusive

It’s god to see other financing options starting to emerge that can help small businesses. Lease financing can also be a solution for capital purchases.

Posted by MADISONCAPITAL | Report as abusive

It’s good to see other financing alternatives starting to emerge that help small business. Lease financing can also be beneficial for capital ourchases.

Posted by MADISONCAPITAL | Report as abusive

Small business loans are very easy to obtain and the lenders also provide them for a maximum tenure.Feeling gud to seeing other financing option.So it is a right choice people.

Posted by vanishalane | Report as abusive