Credit crunch: Businesses still facing financing challenges

When Larry Selensky, president and chief executive officer of Ovation Networks in Cedar Rapids, attempted to secure financing last fall to expand his business, he ran into roadblocks.

“The bank that I was with actually cut my credit line because my business was growing and making money,” Selensky said. “They assumed that because I was growing, I would have more risk by adding people and facilities.”

Eastern Iowa companies continue to encounter resistance on the part of many banks to make loans.

Bankers say they are willing to lend money to creditworthy borrowers, but companies say banks are more inclined to approve loans for buying land or constructing a building, rather than hiring people and growing a business.

Selensky, whose company is a nationwide integrator and manager of wireless technology for the hospitality industry, visited six banks. He shared Ovation Networks's business plan, three years of tax returns, current cash flow and other financials.

“Two of the banks were interested but felt that we would need cash as we grew and they didn't want to be in that situation,” Selensky said. “A couple of the banks came back with deals, but they didn't offer the line of credit or the terms that we needed. They wanted to do business, but they weren't willing to take the risks.

“All of them told me that if I was buying a building or a piece of ground or constructing a building, they would be willing to loan me the money. They were not interested in loaning me money to grow my business.”

Selensky ultimately received financing from Bankers Trust in Cedar Rapids with terms that were close to what he desired.

“I meet with our banker each month to go over our financials, and the bank is very in tune with my business,” Selensky said. “We ended up moving everything to Bankers Trust from the bank where we had been for three years.”

Steve Batcheller, owner and president of A-1 Rental in southwest Cedar Rapids, experienced a different response when he wanted to get a loan to buy out Doug Schumacher, the former owner of A-1 Rental.

“I went to four banks and a credit union,” Batcheller said. “Two banks said ‘yes,' two said ‘maybe' and another said ‘no,' so I was pretty happy about that. The banks that said ‘yes' were willing to work with me on the Small Business Administration guaranteed loan that would fit my business plan.”

Batcheller said determining the value of the equipment that he rents was an issue with some of the banks.

“Some banks want a professional appraisal, which can cost between $5,000 and $10,000,” he said. “Two of the banks simply looked at the equipment and took a practical approach about our appraisal because they know we buy and sell equipment all the time.”

Batcheller credited an abundance of information, including an inch-thick business plan, for helping him convince lenders to offer financing.

“It's really tough. I met with several bankers several times,” he said. “It took being a salesman to get them to go. You really need to catch their attention and understand what you're trying to do.”

As the banking industry recovers from the bursting of the housing bubble and a deep recession, lenders have become more cautious about the types of loans they're willing to make and the risks they're willing to take.

“I think it's mostly coming from regulatory requirements,” said Matt Miller, president and CEO of MobileDemand in Hiawatha, a provider of rugged tablet personal computers. “I think that's especially true for banks that accepted TARP funds. They have a significant number of regulators making sure they're within their covenants with the Federal Reserve.

“We were in a position in 2009 where we had a lot of good things on the horizon, but it still took between five and six months for the SBA loan approval process. It's definitely harder to get financing to expand your business as opposed to buying or constructing a new building.

“I think we're going to see a regulation coming down the pike where banks will be required to have a hard asset for collateral.”

Even with hard assets, positive cash flow and profitability, Bruce Lehrman, CEO of Involta in Marion, found it more difficult to obtain bank financing for a new data storage center in Akron, Ohio, than it was when the company built its first $6.8 million facility in Marion several years ago.

“We have been able to attract both equity and bank financing to continue to support our business, but it's not easy,” Lehrman said. “I think it's tightened down some. Banks are being cautious because they don't know what the ‘new normal' is.”

William Strauss, senior economist with the Federal Reserve Bank of Chicago, believes many banks are concerned that what is adequate capital today will prove inadequate in the future.

“It is widely anticipated that there will be a significant increase in defaults on commercial real estate mortgages in the next several years,” Strauss told an audience March 23 in Maquoketa. “It is widely anticipated that regulatory capital ratios will be raised, but there is uncertainty as to how high these new capital ratios will be and when they will become effective. Banks are hoarding capital rather than committing it for new loans and investments because of these uncertainties.”

James D. Klein, senior vice president of Cedar Rapids Bank & Trust, agreed that banks have plenty of liquidity and his bank prefers to invest in small business loans.

“We were the No. 1 Small Business Administration lender in Iowa last year,” Klein said. “In the last two weeks to 30 days, I've had more loan requests from small business clients than I've had in months.

“A lot of the loans are for business expansions, and I'm working on loans for three new small businesses and they look pretty good.”

While agreeing the banking landscape has changed over the past five years, Klein said 95 percent of the business loans the bank will approve today would have passed muster five years ago. He said loan concentration is a “hot button” for bank regulators.

“If a lot of your loans are commercial real estate or a certain type of equipment or business segment, that's really what they're looking at,” Klein said. “Are you overweighted in any one area? That's what can cause problems.”

Lynn Rowat, market president for West Bank in Iowa City and Coralville, said small business loan applications have declined over the last couple of years.

“People are using their cash flow to pay down debt at a bit of a more rapid pace than they did in the past,” Rowat said. “I think they're paying real close attention to their inventory levels and making sure cash flow is there if they do want to expand.

“With the slight decline in loan demand, we have money to lend and we continue to work with the Small Business Administration to get businesses credit when we can. We're always looking for good loans.”

Michael Dunn, president and CEO of F&M Bank, with offices in Cedar Rapids, Eagle Grove, Manchester and the Twin Cities, said some banks are really tightening down and refusing to make certain types of loans. He said federal regulators also are exerting influence on banks that tend to discourage lending.

“We just had an examination in Eagle Grove, and out of a total loan portfolio of $68 million, we had three loans totaling $348,000 that were ‘classified' or in some kind of trouble (delinquent or non-performing),” Dunn said. “I can't discuss specific bank ratings, but I will say that we didn't get the overall rating we were expecting.”