Large Wall Street firms with a taste for bad debt aren't the only institutions weathering a financial storm these days. In a classic case of trickle-down bad news, small businesses are suffering as well.
But instead of facing a maelstrom, firms seeking expansion funds and entrepreneurs looking for startup cash are enduring a drought. Access to capital has dried up as spooked banks relentlessly tighten their loan requirements.
That translates into greater scrutiny of business plans, bigger demands for collateral and closer supervision after loans are approved-if they go through at all.
"We've seen a lot of horrendous bank failures and mismanagement in the financial markets. I think the repercussions are now coming down the line," said Donald F. Kuratko, executive director of Indiana University's Johnson Center for Entrepreneurship and Innovation. "The auditors are getting much more strict and they're squeezing harder. Which means that banks are squeezing harder on the entrepreneurs."
The cash dearth has sent some owners and entrepreneurs scrambling for alternate funding sources. Startups increasingly may turn to "angel" investors, friends and family for at least a portion of the necessary funds. Meanwhile, businesses in need of day-to-day money for new equipment or to resolve cash flow problems may turn to the lending source of last resort: credit cards.
National and local statistics on the issue are scant, but the information that exists shows the looming outlines of a trend. According to figures from the National Small Business Association, the percentage of its membership using bank loans has steadily declined from 45 percent to 28 percent since 1993. Meanwhile, the percentage using credit cards has increased from 16 percent to 44 percent.
Locally, total SBA guaranteed loan volume this year has declined about 29 percent from the same period in 2007, said Gail Gesell, Indiana district director for the U.S. Small Business Administration. Total dollars loaned declined 22 percent during the same time period.
Companies and individuals still attempting to run the gauntlet and get a bank loan face a far more stringent set of requirements than they did only a few years ago.
"Credit scores have risen," said Victoria Hall, regional director for the Central Indiana Small Business Development Center. "It used to be in the upper 600s, but now they're looking for somewhere in the low- to mid-700 range. It's jumped quite a bit, and that is hurting some of our clients. We have some who are putting their plans on hold and working on improving their credit scores."
Although entrepreneurs always have had to chip in a certain amount of their own capital to get a bank's attention, Kuratko said these days they're far more likely to have to bet the farm. Or at least the house.
"In the past we used a rule of thumb that said you better have at least 20 percent [equity] in the business before you go to the bank," he said. "It may be that now the banks are going to look at, say, 33 percent. It might go from a fifth to a third. I think there's a greater expectation of more equity contributed by the entrepreneur."
So what's the small, put-upon business startup to do? Well, several things-though none are "silver bullets."
"Probably the best thing they can do is work on their credit," Hall said. "Also realize that it's very rare to get a lender to give you 100 percent of what you need to open that business. You need to have some of your own money, whether it's savings or home equity or something along those lines. Or maybe you have family members or can get an investor or two that has faith in you and the business."
Sharon O'Donoghue, executive director of the Business Ownership Initiative of Indiana, routinely counsels her clients on how to handle cash-flow issues in ways that don't involve running after an increasingly-more-problematic cash infusion from the bank. For instance, an entrepreneur who thinks he needs $30,000 to purchase equipment might be encouraged to defray that big bill until he can build up cash reserves and shoulder more of the costs himself.
"Let's say someone's building decks and lacks the equipment they need to cope with a big surge," O'Donoghue said. "Well for the first few jobs maybe they get what they need from a tool rental place and include that cost in their project."
Also, never underestimate what can be accomplished by negotiating with vendors. O'Donoghue says some of her clients have trouble rounding up enough cash to pay the up-front costs of getting ready for a big job. In such cases, she tells them to secure a letter of intent from the person or company that hired them.
"Based on that letter of intent, some suppliers are willing to advance 30- to 60-day credit," she said. "Based on knowing that you're doing it on behalf of what you would call a 'real job.'"
Finally, try to lay off the credit cards. Successful entrepreneurs love to tell stories about how they started their businesses by maxing out their plastic. But there also are plenty of tales of people eaten alive by their usurious rates.
"Certainly this is a way to finance what you would call some of the smaller cashflow issues," O'Donoghue said. "The limits on some of them are as large as what the banks used to offer for lines of credit. But the interest rate is astronomical."
Another alternative for startups is to simply sit out the current crisis and try again to get money in a couple of years, when conditions improve.
But that could have repercussions for a state that relies heavily on new jobs from small concerns, said Barbara Quandt, Indiana state director for the National Federation of Independent Business.
"It could be a serious matter," she said. "Small-business owners are the risk-takers who create nearly 80 percent of the new jobs in the state. There's no question that if [they] aren't out there creating these jobs, we could have a problem. When big business is laying off, small business is generally putting out the 'help wanted' sign."
And though times are tough, in many cases there's still no need to panic. As more than one expert pointed out, banks are in the business of lending money. They have to do it. And they're still looking for decent prospects.
Take the case of Marc Urwand and his wife Deidra Henry, co-owners of Taste CafÃ© in Broad Ripple. They've just been through a year-and-a-half remodeling and expansion program that (hopefully) ends next month. During that time, they've gotten to know the finance system very well.
"We've had several individuals that we've worked with from different banks, and we've actually followed those people to different banks as they changed jobs," Urwand said. "If you've established a relationship with a banker who believes in you and sees your success ... you naturally try to find that same person."
Not that the couple hasn't had to jump through some hoops. They got a loan for their project, but also had to dip into their own resources. "There was definitely lots of dipping," Urwand said.
"I'm not going to say it was easy," he added. "Bankers do their homework. They are not huge risk takers compared to the entrepreneurial business owner."