Small biz lending starting to thaw

The owners of gluten-free bakery Ceres’ Basket felt apprehensive when they arrived at a local bank branch seeking a loan to buy a building for a store in Carmel.

“We were 100 percent ready for a rejection,” said Virginia Fistrovich, who owns the business with Shana Kelso. “We really thought, when we sat down, they were going to laugh us out of there.”

They were wrong. Huntington Bank approved a $175,000 loan in March to help the women buy the property. They’re not alone.

More small businesses in Indiana are securing loans as owners learn to present their companies better and banks warm to small-business lending after years of hesitation. Indiana’s Office of Small Business and Entrepreneurship reported an explosion in financing in 2013 among clients of its consulting program.

Bank loans to the center’s clients more than tripled from the previous year, to almost $126 million, while its number of clients remained relatively steady, the state-run agency reported in late March.

A few companies secured multimillion-dollar loans, driving up lending numbers beyond what was seen elsewhere. But excluding major deals, the overall climate also appears to have swung upward in 2013, said Jacob Schpok, the group’s executive director.

Separately, the number of loans guaranteed by the U.S. Small Business Administration picked up slightly between October and March. But the total dollar amount, about $214 million, is down slightly because borrowers are shifting to a different program that issues smaller loans, the SBA’s Indiana office reported.

Banks around Indiana surveyed by IBJ reported more small-business customers in 2013 and higher loan amounts.

“Triple the growth—nothing like that,” Tim Massey, Indiana regional president for BMO Harris Bank, said, referring to the Office of Small Business and Entrepreneurship numbers. But “we definitely see the economy continuing to improve in the U.S. and Indiana.”

It is a changeup after several tough years for borrowers.

Banks turn around

Major financial institutions largely turned away from lending to small businesses after the recession began in 2008, which left local and regional banks to pick up what they could.

Some smaller Indiana-headquartered banks, such as Muncie-based First Merchants Corp., bolstered their small-business lending to take advantage of the situation. In the past two years, First Merchants hired seven bankers to work with small companies, noted Michael Joyce, director of business banking.

“We felt like there is just a gap that is emerging,” Joyce said.

Then big banks started returning to smaller customers. Thirteen of the largest increased their lending to small businesses by $17 billion from 2011 to 2013, according to a September report from the Consumer Bankers Association.

Also, banks in 2013 began to relax their policies for business loans because of increasing competition for them, the Federal Reserve reported in February.

Outside the national trends, Indiana bankers and small-business advisers said there are several reasons for the boost in lending last year.

‘Working smarter’

Schpok credited part of the rise to the fact that Indiana business owners are “working smarter.”

They are operating leaner, keeping better track of their finances and doing a better job of showing that to banks, he said.

“Entrepreneurs are wising up and realizing that if they’re going to go to the bank to obtain an SBA-guaranteed loan or a line of credit,” he said, “there’s going to be certain expectations for them beyond just having the collateral for that loan.”

Fistrovich and Kelso—who own the gluten-free bakery—spent months conducting research and preparing themselves for their meeting with a banker.

First, they needed to know what banks expected them to have, then they had to find that information.

“They thought we had a pretty good handle on our business,” she said. “We had all our numbers lined up.”

The pair has not yet closed on the building, so they declined to identify the location. They have been selling their baked goods at farmers’ markets and using Indy’s Kitchen as their home office.

The recession forced companies to scrutinize major expenses more, which banks like to see.

“When credit was easier to come by prior to the Great Recession,” said Joyce, of First Merchants, “companies, I think, thought less about what it costs to finance a piece of equipment or expansion of facilities or human capital.”

“When credit became less available, it really forced them to dig into what the [return on investment] is on those capital expenditures.”

Along with stricter spending, small companies started saving a lot more than they used to, giving them more liquid assets to support loans.

“We’ve seen a record [amount] of liquidity on the sidelines, money that companies have kept on their balance sheets in savings and deposit dollars,” said Todd Flick, senior vice president and business banking executive at Fifth Third Bank. “Companies have been very conservative after ’08, ’09 and ’10.”

Confidence boost

Borrowers also have regained confidence, and banks are seeing more of them, Flick said.

“The companies’ performances in general have continued to improve over the last three or four years,” he said.

Steve Spicer, Indianapolis market president for First Financial Bank, pointed to indicators such as the stock market rising more than 30 percent in 2013.

Small businesses are more “nimble” than larger companies, he said, which means they “react more readily to market influences.”

Pam Hunter chalked up her success at securing a loan to “persistence” more than anything.

Hunter, who started Hunter Transportation Inc. with her husband in 2008 in Indianapolis, spent years trying to obtain a loan to buy a facility for her 16-person company, which trucks bakery wastes called “cookie meal” that go into animal feed.

Multiple loan rejections over a couple of years left her feeling “just small and insignificant.”

It wasn’t until she received advice from the SBA and obtained a loan guarantee from the agency that she was able to secure $450,000 from First Merchants for a property in Greenfield.

SBA shift

The SBA program Hunter used, called 504 Loans, has been at the center of a shift in small-business lending in Indiana. The loans are mainly for major capital expenses, such as buying a property.

Program funding surged in the first half of fiscal 2013 to $57.8 million in Indiana, according to the SBA. Loans have dropped to $39.5 million so far in fiscal 2014, which began Oct. 1.

Business owners used the loans to grab up favorably priced real estate in 2012 and 2013, causing the surge, said Gail Gesell, who directs the SBA’s Indiana office.

Companies more recently have used the SBA’s other major program, 7(a) loans, which cover smaller expenses, such as buying inventory or contract financing. The program grew 11 percent in Indiana the past six months, to $174.3 million.

Financial experts originally expected the program to drop off significantly after the recession, said Craig Street, director of SBA lending for Huntington National Bank, the state’s largest SBA lender. The government-backed loans weren’t as necessary as they were in the tougher economy.

But the program caught on.

“It’s like any tool,” he said. “The more you use it, the more you understand how to use it, and the more comfortable your bankers get offering it.”

Small-business lending is still far from its peak in Indiana, Gesell said.

“We’re really just starting” to recover, she said. “As more of the successful entrepreneurs feel more comfortable about their marketplace, I think they’re going to start to look to consider expansion.”•