Tighter Loan Restrictions Prompt Creative Borrowing

By Beacon Staff

It’s a brave new world out there for small business owners seeking capital. In Montana, close relationships with local bankers are still the name of the game for many entrepreneurs, but changes in lending criteria have forced others to look elsewhere in search of funds.

Economic development groups say Montana’s business community, in order to both sustain and grow during this period of economic recovery, is increasingly dipping into a diverse pool of capital sources: friends, family, venture capitalists, tax-increment financing, bridge loans, rural development programs and more.

“Now people are chasing 50 different ways to finance,” said Terry Kramer, president of Kalispell construction firm Kramer Enterprises. “Before, you used to walk into your hometown bank and get your money and go to work.”

According to a recent report by the Small Business Administration (SBA), lending to small businesses fell by 6.2 percent from June 2009 to June 2010, continuing a decline from the previous year. The report defines small business loans as under $1 million, further broken down into sub-categories, the smallest of which – less than $100,000 – began to stabilize last year.

The report lists five major factors in the decline: tightening credit standards, such as additional collateral requirements, greater focus on cash flow considerations and requests for more equity or personal guarantees; weak loan demand from businesses because of concern over the strength of the economy; the health of weak lending institutions; the limitations of SBA programs; and credit gaps for those not meeting bank or SBA lending criteria.

Bankers and economic development officials say the drop has not been as dramatic in Montana as in some states. Nevertheless, loan activity has measurably decreased and businesspeople are running into more obstacles when trying to secure a bank loan.

Kramer said banks used to typically ask for about 20 percent down on commercial loans, “pre-boom and during the boom.” Today, Kramer said banks are asking for 35 percent down, along with more precise business plans and other stipulations.

“I have a $3 million project coming up and I have to have a million bucks – that’s a lot of money,” Kramer said. “Commercial’s always been fairly high but it’s tough right now. Before, you could have a good business idea with some money down, but now you have to be extremely well funded.”

He added: “You can’t say it’s necessarily the banks; it’s the feds. The feds have thrown so many regulations on them they can’t make these quote, unquote, marginal loans.”

John King, president of Three Rivers Bank of Montana in Kalispell, said his bank has always taken a conservative lending approach and has maintained a robust capital-to-troubled assets ratio. King believes banks are in the position to loan, not to become part owners of the business.

“When a bank is investing over 50 percent into a business, the bank owns the business,” King said. “It should be getting back part of the profits. We want to be conservative today so we can do banking tomorrow.”

From 2009 to 2010, Three Rivers Bank’s total commercial loans dropped from 173 to 150, a 13 percent decline. Average loan size fell from $133,000 to $128,000, while total commercial loans dollars decreased by 17 percent.

“So really, a 17 percent drop in loans, I guess it’s depressing, but it’s not too big,” King said. “And like I said, people were paying off loans.”

Kramer and King both said close ties between borrowers and their bankers have persisted in Montana through the downturn, allowing for business dealings not possible outside of small towns.

“All banks have had to adjust their criteria and we definitely have adjusted our criteria,” King said. “But we’re very fortunate that a lot of our customers who trade with our banks commercially have been with us for a long time. So we have a successful track record with them.”

Lynn Dankowski, marketing manager for the Montana Community Development Corporation in Missoula, said her organization works with people who are unable to get a bank loan. After a lull in 2009, the organization’s lending levels in 2010 were almost back up to 2008’s figures, which Dankowski said could be interpreted as banks turning away more people or simply an overall uptick in borrowing. Dankowski tends to think the latter.

“Montana’s lull in lending was not as severe as in other parts of the country,” she said. “We did feel it a bit, but based on our number, we look like we’re holding pretty steady. I read our numbers as a general trend.”

She added: “People are getting more creative with their borrowing.”

The MCDC has more flexibility than banks in collateral requirements, as well as equity and down payment standards. Dankowski said her organization helps borrowers in a variety of ways, including both direct loans to partial loans in partnership with banks. The MCDC also can serve as an intermediary with lenders and a resource to aid with business plans and cash flow issues.

“Overall, Montana probably hasn’t been hit as hard as other parts of the country in terms of availability of credit but we have seen a higher percentage of people struggling and needing financial assistance than we have in the past,” she said.

Kellie Danielson, president of Montana West Economic Development in Kalispell, has also seen an increased number of people seeking business advice. She added that business ventures are generally smaller now, from sole proprietors to five-person operations.

“They come here and say, ‘Here’s my idea; I want to expand my business; I’m having trouble sustaining by business; can you give me guidance, give me assistance?’ Danielson said. “We’re spending probably 75 percent of our time dealing with that.”

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