EVEN AS CIT GROUP (CIT) puts the finishing touches on a plan to right itself, via a $3 billion emergency loan from its bondholders, other lenders haven’t been so lucky.
In May, Advanta (ADVNB), the Spring House, Pa., credit-card company that issued cards solely to small businesses, ceased lending to nearly one million small business customers. American Express (AXP) discontinued its business line of credit and capital line program in January, and Capital One Financial (COF) stopped offering closed-end small business loans just over a year ago.
The small business lending environment may look bleak, but in time, businesses may see some relief. Surviving lenders are retooling their business models, and community banks, which are largely unencumbered by the mortgage meltdown, are stepping up to the plate. In addition, credit unions may soon be freed from a law that limits their ability to provide small business loans.
Here are four types of lenders to look into:
It has been a rocky year for non-bank lenders like Swift Financial. The lender stopped marketing new accounts to small businesses at the beginning of the year, and within the last 30 to 60 days, it decided to exit the small business lending arena entirely. Now, rather than abandoning the operation, the company is exploring potential partnerships with small regional banks and credit unions to help them market and administer accounts to small business customers. The problem for community banks is they lack the [small business] expertise and an ability to scale their operations to cater to these customers, says Ed Harycki, the chief executive of Swift Financial in Wilmington, Del. Swift is trying to reposition itself to work with players who have balance sheet capacity. In today’s environment, you need new underwriting processes and approaches, he says.
With relatively clean balance sheets, community banks offer an excellent source of short-term credit for small businesses, says Brian Hamilton, the CEO of Sageworks, a financial research firm in Raleigh, N.C. They didn’t make the same bad bets as big banks, so they’re in a better position to make loans to small businesses, he says. In fact, a number of community banks are already boosting their small business lending. Leaders Bank of Oak Brook, Ill., which went from $461 million in assets in 2007 to $646 million in assets last year, made 50% more loans to businesses in 2008 than it did the year before. Serving private businesses and entrepreneurs has been our focus since day one, says Jim Lynch, the bank’s president and CEO. If the company has a good relationship with the bank, has managed well, has minimal debt and reasonable liquidity, then they should be able to take on additional leverage to seize opportunities.
Of course, new banks, which popped up after the housing market dropped off, are likely to have even cleaner balance sheets, so they are also in prime position to pick up where big banks and other lenders leave off, says David S. Waddell, the senior investment strategist at Waddell & Associates in Memphis, Tenn. For example, Jackson, N.J.-based Harmony Bank and Memphis, Tenn.-based Metropolitan BancGroup, which both launched last year, say they are in excellent financial condition and ready to lend. Waddell’s advice? Find a newer bank and use your deposit base as collateral, he says. My perception is, new banks don’t have loan issues and may have more capacity to lend.