ST. LOUIS - A pending $35,000 loan will determine the fate of Mohammad Abdolrezagh's business plans.
If Abdolrezagh - who owns Grand Mediterranean Kabob Cafe in St. Louis with his wife - is approved for a business loan through the International Institute St. Louis, the Iranian refugee will have enough money to buy a Chesterfield restaurant and expand his business.
If he's denied, Abdolrezagh said, he'll lose the deal; the current business owner will sell to someone else.
For the tiniest of businesses, small loans are critical for starting up, expanding and surviving.
But competition for loans of $35,000 or less - called micro-loans by lenders - is stiffening. Recent surveys and anecdotes indicate that banks have tightened credit standards for small-business lending. And that's leading entrepreneurs who can't get funding through banks to look for alternatives.
A starting point is nonprofit groups that raise money on their own or work with the Small Business Administration to help out credit-risky companies.
"Anecdotally, I have heard from some [micro-lending nonprofit] organizations that, indeed, the credit crunch is directing more borrowers to their doors," said Elaine Edgcomb, who directs a program through the Aspen Institute in Washington that studies micro-enterprises.
More entrepreneurs are calling and visiting Justine Petersen Housing & Reinvestment Corp. in St. Louis, said Galen Gondolfi, a senior loan counselor.
The nonprofit, which participates in an SBA micro-loan program and lends additional money through its own community development fund, has seen an "increase in referrals due to denials at conventional lenders."
Many of Justine Petersen's clients have low or no credit; the average credit score is about 550, Gondolfi said. Banks consider that too low.
In the past five weeks, Gondolfi said, he's advised five clients denied by banks. Before now, the agency received that kind of referral once every few months.
Thanks in part to the referrals and widespread lending troubles, Justine Petersen expects a greater demand this year in micro-loans. To meet those needs, the agency plans to complete 305 loans in 2008, using money borrowed from the federal government and other money provided by local organizations or banks.
Last year, Justine Petersen originated 235 loans.
Although the credit crunch has increased the applicant pool, it's also made lending decisions more difficult, Gondolfi said. The agency, like banks, still examines an applicant's ability to repay a loan on time, the collateral pledged and the credit history. If a business owner has problems in one of those areas, he said, "it's not a guarantee I'll be able to help you."
Recently, more clients have had late payments on mortgages, which affects credit scores.
"Am I seeing more blemished credit [now than in my six years with Justine Petersen]? Yes," he said.
So denial rates from Justine Petersen have increased in recent months, moving to about 4 percent in winter from about 2 percent in the fall, according to Gondolfi.
But another small-loan lender, the International Institute St. Louis, remains relatively untouched by any lending environment - good or bad. That's because the nonprofit specifically supports immigrants and refugees. Most immigrants and refugees have little or no personal credit history, so getting a loan through a bank would be tough at any time.
To help this group of entrepreneurs, the International Institute created a community development fund in May 2007. Last month, four banks - Southwest Bank, National City, Southern Commercial Bank and Pulaski Bank - pledged $900,000 to the fund through investments and loans. The money will be used over five years to issue micro-loans of $35,000 or less with an interest rate at prime plus 3 percent.
The institute also makes loans to refugee entrepreneurs by using a $1.25 million, five-year grant from the federal Office of Refugee Resettlement. Between the community development fund and the grant, the institute expects to complete 26 loans in the year from October 2007 through September, said Elvir Kolenovic, a senior business consultant.
Abdolrezagh, the restaurant owner, hopes to have one of those 26. In 2006, when he was new to the United States and didn't have a personal credit history, he applied for and received a loan through the institute to pay for an industrial refrigerator, freezer and other equipment for his business. He said he now qualifies for a bank loan but prefers to borrow through the institute because it offers business counseling.
Without the loan, Abdolrezagh said, he wouldn't be able to afford the second restaurant.
"All the money I make is for payments [for my] house" and bills, he said.
To qualify for a loan, the institute typically looks for a credit score of more than 600 for small-business owners who do have credit, Kolenovic said. For entrepreneurs without credit history, a co-signer is needed.
One group of entrepreneurs still has an open door at any institution when it comes to lending: those with good credit. Today, that means a score of 700 or higher, said Edward Lawrence, a professor of finance at the University of Missouri, St. Louis.
Most banks, however, shy from originating micro-loans because the time required to process the loan isn't worth the small revenue received, Lawrence and micro-lender leaders said. SBA-backed business loans and business credit cards are available through banks, but the popular options for many entrepreneurs - such as a home equity line of credit - rely on personal credit history.
Premium on scores
That puts a premium on credit scores.
"Right now, credit is king," said Mike Burke, a U.S. Bank district manager in St. Charles County. "As a small-business owner, your personal credit does matter."