Small businesses still struggling to get loans to grow jobs

Andrew Boyd, owner of Supreme Clientele Barber and Beauty Shop 301 Halsted in Chicago Heights,Il. Friday, August 31, 2012 | Brian Jackson~Sun-Times

Updated: October 4, 2012 6:19AM

As Americans celebrate Labor Day, many small business owners, responsible for nearly two thirds of net new job growth over the past 15 years, are still struggling to get loans amid the weak economic recovery, advocates say.

While credit has loosened since the height of the financial crisis, the dollar volume of loans and numbers of loans made by large banks to small businesses still remains well below the levels seen prior to the recession locally and nationally.

In the Chicago area and nationally, the number of loans made to small businesses with revenues of $1 million or less rose dramatically — 66 percent — in 2011 from 2010, but the total being made is still less than half the number made in 2006, the year before the recession began. Also, the dollar amount of loans made to such Chicago area businesses rose only 5.9 percent last year, compared to 2010 and is down 43 percent from 2006 to $1.8 billion last year.

The decline is because of a variety of factors, including fewer small-business owners applying for loans because of continuing uncertainty over the economy and weaker sales, said Bob Seiwert, senior vice president of the American Bankers Association.

Less valuable collateral, especially of real estate, and damaged credit reports have increased the possibility that bank loan applications will be turned down, said Robin Newberger, senior business economist at the Federal Reserve Bank of Chicago. More stringent underwriting requirements also have made it harder for those seeking loans to qualify, according to Susan Longworth, business economist with the Fed.

Entrepreneurs looking for loans under $350,000 and particularly under $100,000 are having the most difficulty and are exploring other lending options as banks prefer more profitable larger loans, small-business lending experts say.

Jackie Jackson, who has been in business since 2008 as owner and operator of Kilwins Chocolates & Fudge, an ice cream and chocolate shop in Old Town employing 10 people, said in the past she had a $60,000 line of credit. But amid the weak economy, she said that was pulled even though she had an 800 credit score and had never been late on any loans.

She said she has been repeatedly turned down for a loan, which she has been seeking to help her expand to a second site in Hyde Park.

“I tried every bank in Chicago, every place,” she said. “It has been very difficult. Initially, I was looking for about $150,000 When I found that wouldn’t work, I dwindled it down to $100,000, then to $75,000 to $50,000.”

She is now working with Chicago-based FundWell, an online business that helps connect small-business owners to potential lending sources.

“In the small loan category, there’s still the need for capital.” said Marianne Markowitz, regional administrator with the U.S. Small Business Administration in Chicago, which has developed targeted programs to assist such borrowers, including its Small Loan Advantage and Community Advantage programs. “The higher the loan amount, the more people are interested in lending to you,” Markowitz said.

Andrew Boyd opened Supreme Clientele Barber & Beauty Shop in Chicago Heights in 2004, and last year applied for a bank loan to help him expand to a second shop. His vision was to make his second shop more upscale with the addition of a masseuse and nail services, and he chose a site across the street from Prairie State College, filled with potential new clients.

“I had a credit score well over 700, and I paid cash for the building,” said Boyd, who employs seven people.

But he said he was repeatedly rejected for a loan.

Kelly Copeland, founder of two-year-old Advanced Climate Solutions in Manteno, an air conditioning, heating and refrigeration service and repair business that employs five people, said he applied last year for a working capital and expansion loan but was rejected by his bank.

“I had a very good record with them,” he said. “They just said no. I had a secured contract and was showing over $250,000 in documented receivables. I took that to the bank and couldn’t get nothing done.”

Boyd and Copeland both turned to Accion Chicago, an alternative nonprofit lending organization that provides credit and counseling services to small businesses.

Boyd received $50,000 in loan funds to help with his expansion, and he said he plans to boost his staff from seven employees to 23 when the new site opens this month.

Copeland said he received $20,000, which helped him purchase vehicles and that he’s also using for working capital. Without the working capital that enabled him to accommodate his influx of work, he said, he likely would have had to close.

When small-business owners can’t access capital, it can lead to their paying vendors slower and can have a ripple effect hurting other small businesses and lead to job loss, said Chinwe Onyeagoro, FundWell chief executive officer and co-founder.

Copeland said thanks in part to the loan he received from Accion, he plans to add another employee.

Accion, which historically has worked with businesses that have had difficulty accessing traditional sources of financing, saw an 80 percent increase in applications between 2008 and 2011, according to Mary Fran Riley, vice president of development. It also has seen an increase in borrowers with higher credit scores that in the past could qualify for bank financing, said Robin Lee Greiner, chief operating officer at Accion.

“We are seeing people we didn’t see before, people who have credit scores in the 700 range,” said Greiner. “They come to us now because the banks are not lending to them. When we increased our loan size from $25,000 to $50,000 this year, we saw a 40 percent increase in our applications per month.”

That points to pent-up demand, she said, adding funding and help from government agencies, including the SBA and Department of Commerce, enabled Accion to increase its maximum loan size.

There’s anecdotal evidence that other nontraditional lenders are seeing increased demand, according to Longworth and Newberger, who have done research on the trend. Community based small-business lenders report they have been busier than ever, Longworth and Newberger said.

The need for wider access to small-sized business loans is great, according to Greiner.

“We have 90 percent of the micro-loan capacity in the Chicagoland area,” she said of Accion. “We estimate that represents only 5 percent of the total demand.”

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