September 2009
Credit Crunch Crisis
by Terri Nighswonger

With lines of credit slashed, interest rates skyrocketing and banks calling in loans, it’s a difficult time for even the healthiest of small businesses.

“My cash flow is killing me,” says Stan Skrbis, owner of Apollo Plastics in Mentor, “and I haven’t found anyone (to help).” His business has been affected by reduced credit lines and banks that don’t even want to give him the time of day.

Many Lake County-area small businesses have spent the better part of 2009 dealing with reduced credit lines and increased interest rates even if they have perfect payment histories. Businesses that in most years weathered the financial storm and felt like they were in calmer waters are feeling let down by the federal government’s stimulus package and banks. Now many of these businesses are wondering how they are going to stay afloat until the economy improves.

The bank bailout and the most-recent federal stimulus package were supposed to loosen credit for small businesses, but getting a loan, if anything, is harder than ever for most businesses.

With Small Business Administration loan programs available – some of which were changed or initiated to supposedly help small businesses – there is money to be had, bankers say, but will it be too little, too late for some entrepreneurs?

Skrbis says he’s been talking with banks over the past month and has found that some of the smaller ones are a little more open to helping.

“It’s the only thing that is a little positive that makes me think maybe things are turning around,” he says.

Weathering the storm

In addition to SBA loan issues, small businesses are dealing with “worsening credit card terms,” as well as arbitrary reductions in their credit card limits, according to a National Small Business Association report. Nearly 4 in 10 small-business owners polled said they are not able to get the financing they need to run their businesses.

From April 2008 to April 2009, 41 percent of small businesses reported reduced credit limits, 63 percent increased interest rates and 23 percent with fixed-rate interest converted to variable rates. Lake County business owners are doing everything they can to weather the storm.

Since January, Skrbis has laid off five people from his custom injection molding business and quit taking a paycheck for himself. He brought back three employees in May. He’s laid two off since then, but hopes to bring them back in October. If that happens, he’ll be back to eight employees and two full shifts.

Apollo provides plastic parts for the automotive, plumbing and health care industries, and others. Skrbis says that with so many different industries, he’s always busy and his sales are only off by about 10 percent from last year.

“I’ve been really lucky, while some others in my industry are really hurting,” he says, adding that hasn’t been enough to stay away from cash-flow issues due to changing credit terms.

Greg Ferrazza, senior vice president of commercial lending for Citizens Bank, works with Lake County companies similar to Apollo Plastics.

“I’ve never worked so hard in my life to put money on the street,” Ferrazza says. “We’re looking at every opportunity, but it’s tough for banks to lend into this environment. What got us into this mess was banks were too aggressive. Banks don’t want to get back to that right away, so they’re looking for ways to mitigate that weakness through the SBA and other loan guarantee programs.”

Help is out there

The SBA, the Lake County Port Authority and the state are looking for ways to help. Ferrazza recently partnered with Allen Weaver at the Lake County Small Business Development Center to provide funding for new construction through the SBA’s 504 program.

“We have approved 12 SBA 504 projects so far this year representing approximately $16 million in new capital infusion and have further assisted businesses in our area to obtain an additional $3.9 million in other types of financing,” says Weaver, program director of the LCSBDC and Lake County Small Business Assistance Corp. Both programs are part of the port authority, as well as the Procurement Technical Assistance Center, the International Trade Assistance Center and the Service Corps of Retired Executives-Lake County Branch.

The SBA 504 program has been around for a long time, Weaver says, and can be used to restructure debt to lower payments and ease cash flow. Banks on SBA’s preferred lenders list can make the decision themselves and turn responses around within two weeks.

“You hear of some companies that are failing, and there are companies that are growing and expanding and adding jobs. The difficulty has been finding the financing mechanism to allow them to grow. The work that Allen is doing is helping those that are growing,” says John Loftus, executive director of the Lake County Port Authority.

“When you have someone who is doing OK, the 504 gives them that opportunity to grow,” Weaver says.

An SBA emergency bridge loan of up to $35,000 is available from the $255 million federal program called America’s Recovery Capital. Small businesses don’t have to make a payment on the loans for 18 months and have five years to repay them in full.

“What I’m hearing is there are not a whole lot of those loans being made. Banks are being selective,” Weaver says of the program that only began in June. “Companies that are experiencing a downturn in revenue, are having trouble making loan payments, that type of thing (are considered). It has to be used for that purpose. There is no interest ever (on the loan), and the borrower pays nothing for 18 months.”

The port authority makes group presentations and uses its newsletter to get the message out that it’s available to help.

“It’s a new world in terms of financing,” says Loftus of the port authority. “Half the challenge we face is getting to the businesses themselves. With the flood of programs (out there), we’re trying to make sense of an alphabet soup. It’s tough enough for us to keep up, and that’s what we’re paid to do. Individual businesses can’t.”

Weaver finds similar challenges. “We meet with companies and try to find programs to assist with financing with SBA being the primary tool. We act as a counseling intermediary to find the right program and bank. That’s been my challenge in the last eight months, and I’ve had some success,” he says.

The port authority also is working with county commissioners on additional programs that can supplement other financing mechanisms. A community development block grant of $25,000 for start-up businesses is available. In addition, a $300,000 revolving loan fund is in the works.

“What we would like to try to do with that program is take that money and use it in conjunction with one of the SBA programs to maximize the impact of a small amount of money and use it to enhance the other loans,” Weaver says.

From a banker’s perspective, Ferrazza provides some practical advice to small businesses.

“If they can come in with information such as in a situation where the performance of the business hasn’t been the greatest and if they put together a solid projection based on real assumptions … sort of a business forecast … we can plot through it together,” he says.

Ferrazza also advocates showing your bank that you are doing things to trim unnecessary expenses and keeping the lines of communication open with the bank.

“Banks don’t like surprises,” he said. “Good customers give you updates and provide you with information if they’re on top of the situation.”

Size matters

Steve Millard, president and executive director of the Council of Smaller Enterprises, the regional small business support organization with 17,000 members, recommends businesses look into finding a smaller bank.

“At some of these smaller banks they are doing business underwriting that goes beyond the credit score and are not under as much government scrutiny.

They have money to lend, and they understand a small company. I think that large banks are unable to take the risk,” Millard says. “Get out and meet the smaller bankers. They are hungry to make good loans.”

Millard also suggests small businesses get more aggressive on collections. This is not the time to be cutting customers slack.

The COSE Small Business Conference Oct. 21-22 will provide participants with a finance track, including discussions and workshops on financing and lending, access to capital, and credit and collections practices. Information can be found at www.cose.org/sbc. Workshops and informational sessions also are offered regularly on the COSE calendar.

Sean McGreal, partner of Industrial Ventilation in Euclid, has laid off employees, cut costs and attempted to expand his product into new markets to help during the credit crunch. While sales are down about 70 percent from last year, he says his order level has increased over the last four to five weeks and he’s been quoting a number of six-figure projects.

“It would go a long way to keep us open if even half of those came through,” he said

McGreal and his partners have stopped taking paychecks for the time being and are staying away from banks. He says their lines of credit have not been cut, but are maxed out.

According to a Business Week article from late 2008, banks were already refusing to renew lines of credit and calling in loans made to businesses that were current on payments.

“We don’t want the knock on the door that says it’s time to pay back,” McGreal says. “I’ve learned we’ve been far too slow to react to the economy. When the rest of the world was screaming, we were counting our money. This time last year when the rest were in recession, we were posting our best months. Then the light switch turned off.”

Terri Nighswonger is editor of Family magazines.