The banks kept turning him down, and Samuel Demisse couldn't figure out why. Demisse, the owner of a Baltimore-based coffee bean import business, believed he had proven his business acumen by carefully managing costs and expenses. Consumer demand for specialty coffee was growing, orders for the pre-roasted beans were pouring in from customers in the United States and abroad, and supply from Ethiopia was robust.
But without credit, Demisse had no way to order another shipment of beans — and had no inventory to sell. When a nonbank, private lending group offered him a $75,000 loan three months ago, Demisse jumped at the opportunity, even though he had to pay twice as much interest as he would have with a conventional bank loan. The lender, Atlanta-based Funding Strategy Partners, agreed to the loan after reviewing the company's list of customers and noting that sales volume had tripled this year over last year.
Without the loan, Demisse said, he would be struggling for survival. "It would be really tough," said Demisse, whose four-year-old company, Keffa Coffee LLC, is based in White Marsh and rents warehouse space in Dundalk. "Capital is the blood of any small business — to have inventory, to pay the bills, to keep the lights on."
While the credit crunch has put a crimp on consumer borrowing, it has taken an especially heavy toll on small businesses. With the financial crisis prompting banks to tighten lending criteria, access to credit has become one of the biggest challenges small-business owners face in a troubled economy. Even growing businesses often do not qualify for bank loans because of declining values of collateral, such as an owner's home, commercial real estate or business equipment.
To fill the void in bank lending, small businesses are exploring loans from alternative sources: nonbank, private lenders, nontraditional forms of financing such as factoring, expansions of government-backed business loans, and strategic alliances between large and small businesses. Some of the alternatives come with high costs, even for companies with stellar credit.
Christian Johansson, secretary of Maryland's Department of Business and Economic Development, says he talks to business owners every day who can't get a loan or line of credit. "They have good credit, but they can't grow or expand," he said. "This crisis was created in other places, [but] it's really affecting Main Street America. Small businesses without the reserves of larger businesses were less prepared to weather the storm we've been through."
Lack of credit has left some small businesses struggling for day-to-day survival. Others have put plans on hold to expand or hire.
Access to capital for small businesses is not nearly as available as credit for larger organizations, said Craig Panos, a business counselor with the Maryland Small Business Development Center. "There have been programs targeted to [small firms], but they have not been sufficient for most of these businesses."
Many small firms would have "sailed through" the underwriting process two years ago and by "normal" standards should be getting loans, Panos said, but are not because banks' underwriting standards are now so strict.
Maybe help's on the way
Small-business advocates hope capital will start to flow more freely in the wake of Congress' passage last month of a small-business tax and lending assistance bill, signed into law Sept. 27 by President Barack Obama. Supporters say the mix of tax breaks and improved access to credit could save many small-business owners from bankruptcy.
Bob McMahon, president of Aegis Factors Inc., based in Fort Myers, Fla., said the recession and lack of traditional financing had renewed interest in the type of capital he offers. As a factoring company, his business purchases accounts receivable or invoices from businesses at a discount, giving them an immediate infusion of cash to keep operating.
"We're seeing more and more interest from … businesses being started by people who can't find jobs," McMahon said. "Even the newest businesses can factor, as long as they're dealing with creditworthy customers." Factoring companies review the creditworthiness of the accounts — not of the company selling the invoices.
Joe Holland, president of Columbia-based Holland Construction, provides another type of unconventional lending. Tired of seeing projects he was about to start for small-business clients go nowhere, Holland put in place this year a program that offers customized financing plans.
The commercial contracting company — which works with owners or investors in office buildings, shopping centers, health care facilities, schools and libraries — has deferred client fees in some cases and also established ownership or equity positions in projects, working out arrangements on several endeavors in Maryland and Pennsylvania.
"We were finding a lot of our customers and potential customers were having issues getting projects started," Holland said. "Banks have tightened their belts and are scrutinizing their lending policies, [and] the lending reviews are much more stringent. Customers need greater loan-to-value, meaning our clients have to come up with a greater amount of equity to put in deals. It's one of the primary causes of a lot of deals we've been involved in not getting off the ground."
Nonprofits as lenders
Dennis Kleppick, a loan officer with the Annapolis office of Business Finance Group Inc., a nonprofit lender that provides Small Business Administration-backed financing for small businesses that want to purchase real estate or buy equipment, said most of his business comes from referrals from bankers who can't take on the risk themselves. Under the SBA's 504 program, the bank lends 50 percent of the total loan, while the nonprofit lender puts up 40 percent.
"I'd say 85 to 90 percent of [business] comes from bankers who are trying to lend money and want to but are concerned about bank risk," Kleppick said. "Most of the deals we've done have been existing businesses that are expanding or have the opportunity to buy space instead of leasing space." But Kleppick said he also finds himself having to turn away business.
"We get calls from businesses that have obviously been in financial difficulty and are trying to refinance existing bank loans, which we cannot do," he said.
That might change thanks to provisions in the newly enacted small-business law, which will not only increase the maximum loan size for the 504 program from $1.5 million to $5 million but will also, for the first time, allow the refinancing of existing commercial mortgages.
"That may well help clients whose bank is calling [in] the loan, for whatever reason," Kleppick said.
Among other provisions, the law allows for an additional $14 billion worth of SBA "recovery" loans and creates a $30 billion lending fund to provide capital to small banks that make small-business loans.
Another effort, the State Small Business Credit Initiative, was modeled after a Maryland loan guarantee program that state officials expanded this year to increase financing for small businesses. The $1.5 billion initiative will funnel money to state programs, such as Maryland's, and is designed to either guarantee portions of loans or provide additional collateral to borrowers.
On Thursday, DBED's Johansson and a U.S. Treasury Department official announced that Maryland stood to receive $23 million from the federal initiative; the state will be required to leverage that amount into $230 million worth of loans. Johansson said he expected the lending to spur the creation or retention of thousands of jobs.
Demisse, the head of Keffa Coffee, says the loan from the private lending group has allowed him to order a second variety of coffee bean to satisfy growing demand from roasters throughout the United States and Canada and as far away as Taiwan. By the end of the year, he said, he hopes to expand his offices and hire a small sales team.
"The specialty coffee market is growing very fast," he said. "Every year demand is up."