Paying the piper
At the Westchester Small Business Development Center, Director Thomas Morley has seen the effects of a tighter credit market on the startup entrepreneurs and business owners his office serves in Westchester, Rockland and Putnam counties.
“In the lenders”™ defense, they are lending money and money is available,” he said. “I would classify some of it as a correction” after years of easily obtained credit. Banks and other lenders “are requiring that the packages be a little more diligently prepared” and scrutinizing applicants”™ business plans more closely.
“Some of it is a correction, but there is a credit tightening that has happened in the last year, absolutely,” said Morley, whose office on the Rockland Community College campus in Suffern also maintains outreach offices in Dobbs Ferry and Harrison.
“The first ones to go were the more marginal packages,” he said. “Last year, a credit score of 700 or 650 was generally not too bad. If 650 could get you a $50,000 loan for your business, this year it”™s like 675” to qualify for that same loan, he said.
Home equity loans, a traditional means of financing for small businesses in the last 10 to 15 years, “have gotten more difficult to get and the banks have gotten more critical on them,” he said. “Nowadays everybody gets more nervous more quickly” if a borrower is late on payments.
“We”™re finding it more difficult to get more packages that are less collateralized than in the past,” with personal credit scores and personal guarantees no longer enough to obtain financing. Lenders more often require real estate collateral, a deterrent to some start-up entrepreneurs who, looking for a $25,000 or $50,000 unsecured loan, decide they”™re not willing “to bet the house” on their business venture, Morley said.
“More lenders in general are looking for shorter-term packages,” Morley said. A seven-year loan for equipment financing now might be five years, “which makes it more difficult just based on the value of the payment” a borrower must make.
“Where credit has been tightest is on folks who are doing startups” and typically seeking to borrow $15,000 to $25,000, he said.
Morley pointed to “the dark side” of small business in a slowed economy: “As credit tightens, small-business owners will use credit cards for easy access to capital.” That added debt can lower credit scores and send a small business into a downward spiral.
Credit-card debt “is very expensive borrowing when you do it for a small business and it”™s easy money for small businesses to get in trouble with. So that”™s created some issues for us with some clients,” he said.
“Small-business owners need to look closely at the fiscal management of their business” and determine how to cut costs, he said. “Fiscal management is what companies in times like this really need to focus on. Whether we”™re in the ”˜r-word”™ or not, folks need to look very critically at how they”™re marketing and selling their products and how do I boost sales in a slowing economy, which is not always by raising prices.”
In Westchester and Rockland counties, limited alternative financing is available to qualifying existing small businesses and start-up borrowers who have been declined by a lending institution. Loans range from $2,500 to $30,000 at terms of one to five years. Use of the funds must result in the retention or creation of jobs in either of the two counties.
Officials at the Westchester County Industrial Development Agency (IDA) and county Office of Economic Development, which administer the fund in cooperation with the Rockland Economic Development Corp., said about $100,000 is currently available in the loan program, which was funded originally by a $750,000 grant from Empire State Development Corp. The county IDA in 2007 took over administration of the program from the Westchester County Association.
County IDA Executive Director Theresa G. Waivada said three loans have been approved this year for small businesses in the county. Since promoting what had been an underutilized resource in the small-business community, “We have been very successful,” she said. “We”™re going to be talking to the state about reenergizing it” with additional funding.
As credit has tightened, said Morley at the region”™s Small Business Development Center, “We”™re also seeing that entrepreneurs still are passionate about starting small businesses,” especially among the baby boom generation entering early and active retirement. Delicatessens, restaurants and small service companies are especially popular, he said.
“In the past year, we”™ve had like eight deli clients,” Morley said. “In each case, they were acquisitions of existing delis” whose owners were retiring. The new owners “are looking at 10 to 15 years before they retire,” he said.
“I think people are seeing opportunity in traditional businesses. People always have to eat.”
Morley said his office also has seen “an uptick in interest in franchises” by entrepreneurs, including small cleaning services and convenience stores. “You”™re working for something that”™s basically tried and true,” he said, what Morley calls a “formula business.” And startup costs for a franchise typically require less of an investment, he said.
Some of those popular startups, however, such as restaurants and lawn-care companies, “will get hit hardest” as the economy further slows in the next year, Morley said.
“In counties like Rockland and Westchester, those discretionary-spending businesses are going to be the first to suffer,” he said.
When borrowing, “They”™ve got to be smarter about what they need and smarter about how they”™re going to use it.”