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Monday, Apr 22, 2024

Chilly Forecast for Businesses Seeking Loans, Lines of Credit

Securing a line of credit or business loan is no small undertaking these days, whether you’re a healthy company looking to expand or a business owner just trying to ride-out the tough economy. U.S. Small Business Administration-backed loans alone have dropped in Los Angeles, Santa Barbara and Ventura counties. In 2007, 140 participating lenders in the region made 6,200 SBA loans. Last year the number dropped to 3,700. And in 2009, area financial institutions will sign-off on about 1,600 loans, according to the SBA. “Weekly approvals have gone from 120 in 2007 to 70 in 2008 to only 30 this year,” said Alberto G. Alvarado, district director of the Los Angeles District of the SBA. “We have a challenged small business community in terms of accessing credit.” Financial institutions across the board have tightened their underwriting standards. But capital and credit are available, according to local financial pros. Banks are lending to viable companies. And, some businesses struggling to make ends meet can tap alternative financing and/or pursue debt re-structuring. “The economic environment over the past 12 months has essentially affected every bank and business in the Los Angeles area,” said Roc Caldarone, region manager and senior vice president for Wells Fargo California Business Banking. When it comes to lending and underwriting banks are reverting back to the Five C’s: Capacity, the company’s cash flow and ability to re-pay the loan; Capital, the owner’s stake or equity in the business; Collateral, assets or up-front investment; Conditions, the type of business given the current economy and what the money will be used for; and Character, FICO scores and principal’s business experience. Wells Fargo made 121 SBA loans in the Los Angeles area worth $33.7 million in the nine months ending in early June 2009, said Caldarone. More than 20 bankers are also on-hand in the San Fernando Valley area to consult business owners on financing or debt re-structuring. “Business owners need to put together three years of financials for the company, three years of personal financial information, and it may be appropriate to have a budget,” said Caldarone. “But, not everything can be re-structured.” If conventional financing is not an option, Wells Fargo may work with business owners to re-structure existing debt, tap community partners to spread out the risk of financing, and develop strategies for streamlining operating costs. The problem many business owners face when applying for a line of credit or business loan is that they’re over leveraged, said Nishen Radia, managing director of FocalPoint Partners LLC, an investment bank in Los Angeles. The ones getting hit the hardest bought property or invested in businesses when appraisals and valuations were high. Some of these companies may have $8 worth of debt for every $1 worth of operating profit. The number of potential lenders out there has also decreased. If borrowers default on a loan payment, some lenders just assume foreclose on the property or hash out the debt in bankruptcy court rather than re-structure. “Certainly since the credit crisis hit, leverage in the marketplace was not going to be sustainable,” said Radia. “Companies are working twice as hard to maintain profitability and lenders are being twice as conservative.” In April 2009, there were 1,008 Chapter 7 bankruptcies in the Valley, up 93.1 percent from the same period a year ago; 10 Chapter 11 bankruptcies, down from 11 at the same time last year; and 385 Chapter 13 filings, up 37.5 percent from 280 a year ago. Get help Business owners have the best chance of securing additional capital if they get help before defaulting on a loan payment, said Radia. And they need to be careful not to tip existing and potential lenders off to their distress and make concessions if they’re not getting something in return. “The key is to be proactive,” said Radia, adding selling off assets to raise money, securing mezzanine capital, restructuring existing debt, or giving up some ownership of the company to equity investors are all options. Fidelity Mortgage Lenders in Los Angeles is one company that’s profiting by the lack of credit available to businesses from conventional lenders. The company provides up to $25 million in mortgage financing based on the amount of equity a business owner has in his/her commercial property. As long as the loan-to-value ratio is no more than 40-50 percent, Fidelity does not require extensive documentation such as three years of financials, etc. “In this climate we’re seeing a lot more loan requests on free and clear property,” said Larry Frank, loan manager with Fidelity. “Banks won’t provide some of these business owners with credit because the business owner’s cash flow is down.” The company writes fixed-rate mortgages for up to 20 years fully amortized, and turns most loans around in 10-15 days. The average loan is $700,000 and Fidelity accesses the capital from a core group of investors. The catch, however, is interest rates are higher (right now 10.5 APR for somebody with good credit) than conventional bank financing. And most people pursue this type of debt with the intent of re-financing when the credit markets loosen up. “It’s the kind of thing where the business owner needs to consult with his financial professional and see if it works,” said Frank. “And we’re not just putting in a deal that doesn’t work for us.”

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