Lack of customers, assets stunting growth of small business

By Binyamin Appelbaum and Ylan Q. Mui
Washington Post Staff Writers
Tuesday, February 23, 2010; A12

The Obama administration says the nation's small businesses are waiting for loans so they can start growing again, sparking economic recovery.

Many small-business owners say they're still grappling with a more basic problem: They don't have enough customers.

A survey to be released Tuesday by the National Federation of Independent Business, a trade group, found that 51 percent of small-business owners reported a lack of sales as their greatest challenge. Only 8 percent cited a lack of loans.

In addition, the NFIB found that the drop in home prices has made it harder for many small-business owners to qualify for loans because they can no longer pledge their homes as collateral.

The fundamental nature of the problems -- lack of sales, lack of assets -- underscores the difficulty in jump-starting small-business growth while the broader economy continues to struggle.

William J. Dennis Jr., the NFIB senior research fellow who headed the survey, said recent administration proposals, including $30 billion in new federal aid for community banks, were not likely to help. But he also said the NFIB was at a rare loss for ideas on what the government should do instead.

"We're really in a quandary right now," Dennis said.

Administration officials said that the latest proposals were part of a broader effort to revive the economy, including the massive stimulus package passed last year, but that they were critical because more businesses were struggling to get loans.

"The president would not have made passage of a $787 billion stimulus plan his first priority, and would not be pressing for additional measures to spark job growth today, if he did not understand the primary importance of spurring economic demand," said Gene Sperling, a counselor to Treasury Secretary Timothy F. Geithner. "However, there is no question that as the new NFIB survey makes clear, one of the key elements that can weigh against recovery is whether credit-worthy businesses are being denied the loans that they need to expand and create jobs."

'Brick lending'

President Obama unveiled a new focus on small businesses in his State of the Union address, responding to massive political pressure from Democrats, including congressional leaders who complained that the administration was overly focused on helping large companies and banks.

A key element of the new plan is to reverse the decline in lending to small businesses. Banks reduced the amount of money extended to small businesses by $15.7 billion, or 2 percent, between September 2008 and September 2009, federal data show. Obama proposed a new round of federal aid to community banks, up to $300 million per bank and $30 billion in total, to bolster the capital reserves that banks hold against unexpected losses, letting banks make more loans and take more risks.

But many small-business owners say that they're not ready for a trip to the bank. David Borris, who runs a catering business outside Chicago, said his revenue dropped 14 percent last year as companies cut back on events and families reined in celebrations. "We need to see money moving into the pockets of the middle and upper-middle class," Borris said. "Those are my customers."

The NFIB survey also found that one-third of small-business owners who borrowed money either took out a mortgage on their home or pledged their home as collateral. Many homes have lost value.

"We call it 'brick lending,' " said Jerry Duffy, a lending officer at Jefferson Leasing in Crofton, which specializes in lending money for small firms to lease vehicles. "We can't take the time to figure out the ins and outs of the plumbing business, so when a small-business person wants to borrow money, the first thing we say is, 'Tell me about your home.' " Duffy said Jefferson, an arm of the Bancorp Bank, has enough money to lend, but many applicants no longer have enough home equity to qualify for loans.

Even as these problems have limited the number of businesses looking for loans, banks also have cut back, imposing tougher qualification standards on applicants.

Jim Henderson, owner of Dynamic Sales, a construction supply company near St. Louis, said he approached the bank where he had done business for nearly two decades to increase his $75,000 line of credit to $150,000 to buy more inventory and hire more salespeople. The bank said no.

"I want to move forward and take those risks and bet on the future," said Henderson, whose company just posted its 13th consecutive year of record sales. The problem is, "No one's really giving us a hand to do that."

As the economy begins to recover, sales start to grow and more companies start seeking loans, the administration wants to make sure that banks are not standing in the way. A year ago, the primary worry was companies that couldn't get the loans they needed to survive. Now, Sperling said, it is increasingly about companies that can't get loans that they need to expand.

"When a company in a position to expand can't get the credit it needs based on overly constrained credit policies," Sperling said, "that works against recovery, and that feeds the negative cycle as opposed to starting up a positive cycle of expansion."

Four years ago, Oswaldo Acosta used a loan from the Latino Economic Development Corp. in the Washington area to launch Picante Foods, which imports ethnic food to sell to grocery stores.

His company began turning a profit two years ago, and Acosta said his biggest challenge now is securing the next level of financing to buy more products and increase sales. He said his company falls into a Bermuda Triangle of borrowing: It's gotten too big for LEDC, it's still too small for venture capitals or angel investors and it's not established enough for banks.

"You have to be stubborn, but up to a point," Acosta said. "It has to grow. If I don't get the money, I don't see how I can keep myself motivated."

© 2010 The Washington Post Company