The Credit Odyssey: Utah businesses still having to look hard for access to credit, capital

Just as President Obama was meeting with bankers this week to give them a stern lecture on the lack of business loans they’ve pumped into the economy since receiving billions in stimulus funds, businesses in Utah still report they find themselves searching high and low for someone – anyone – who can offer them a loan. In fact, some businesses have reported going through quite an odyssey in their search for capital.

Access to capital is another aspect of the “new normal” brought on by the recent financial crisis and current recession. New lending standards that require deeper due diligence and cleaner balance sheets have been implemented by banks, and many of the largest banks that received the lion’s share of stimulus funding have cut their small business lending programs. The Federal Reserve Board reports that as of Q4 2009, banks still are tightening standards and terms for “all major types of loans to businesses and households.” The U.S. Senate’s Democratic Policy Committee repeated the U.S. Treasury’s report that banks propped up by the Troubled Asset Relief Program (TARP) cut their small business loan balances by $10.5 billion, and that the Recovery Act, designed to give loan relief by way of fee elimination on 7(a) and 504 SBA loans, will be out of money by the end of 2009.

One Utah developer currently engaged in real estate projects in Northern Utah and Southeastern Idaho reported having to travel a long road to find funding for his projects. When time came to refinance his projects, his odyssey to find a taker took him from his hometown bank in Utah, which declined to fund the project, to banks, insurance companies and private equity firms across the U.S. who have teamed up to fund real estate transactions using mechanisms similar to how Hollywood has been funding big-budget movie productions for years. Instead of a traditional one-on-one interaction with a banker, banks are now accessing and leveraging blocked-off funds housed in other banks, usually on deposit from high-net worth individuals or private equity firms, and through insured, securitized letters of credit accessing these funds to provide capital to projects as simple as real estate. “I had to map out how the process worked, and make dozens of phone calls” the developer reported, preferring to remain anonymous due to the on-going nature of his projects. “I had to keep asking questions to put together the pieces and the parties that could fund the project. No one is there to guide you through it.” The result of such a system is money that is highly marked up, with each party along the funding path applying their fees and interest. The process is also extremely slow and cumbersome. “It took me months to piece all the parties together, but it finally came together,” the developer reported, exhausted from a process that had no guarantee of a Hollywood ending.

Other Utah firms are turning to less traditional means of funding. Merchant cash advances, which are similar to consumer payday cash advances and business accounts receivables factoring, are loans made against future credit card transactions. But the fees and the terms associated with merchant cash advances make them less attractive. Rates can be as high as 18 – 25% over a term of just 12 to 18 months, which can skim a lot of the top of a small business’s margin per transaction. Michelle Mannikko, a Salt Lake City representative of Dun & Bradstreet, the commercial credit and market data firm that tracks the financial and operational performance of businesses around the world, works with Utah-based financial institutions and companies that target small businesses. Mannikko indicates that companies engaged in alternative forms of financing are doing a lot of business nowadays. Firms in the transportation industry, among others “have been doing a lot,” said Mannikko, indicating that firms in capital-intensive industries that need frequently sources of funding to maintain operations are resorting to alternative means of financing.

But it’s not all bad news. Firms that are patient and persistent enough can find the financing. The Salt Lake Tribune recently reported that in the banks’ opinion small business lending in Utah is still “strong,” with small business loan volumes at Zion’s Bank, Key Bank and Wells Fargo beginning to return to respectable levels. This paints quite a contrast with the recent Federal Reserve Report on small business lending and the reports on the SBA programs running out of funds.

However, amid the cloud of uncertainty and the long journeys some businesses must travel to piece together the parties to find financing, one thing is certain: the new normal is requiring that business think differently about whom and how they approach their funding needs.