Small-business owners are enjoying abundant credit, but some banks are still neglecting segments of the market, according to a researcher at the National Federation of Independent Business.
"For most people, it's a golden age of borrowing," said William Dennis, senior researcher at the 6,000-member trade association. "But if you're one of the people that can't get credit, it's a real problem."
In a December survey of 800 federation members, 6% had trouble finding financing, about the same as in the preceding two years.
Mr. Dennis said banks still need to increase their efforts to serve start-ups, rapidly growing businesses, and marginally creditworthy businesses. Larger start-ups that need more than $100,000 typically cannot qualify for business loans because they lack an established credit history, he said.
Entrepreneurs often have trouble raising $100,000 from personal savings or credit cards, and they are too small to attract traditional venture capital financing, he said. Paul Jost, president of Chandler Management Corp., recalled that no banks would finance his Arlington, Va.-based company, which buys and renovates apartment buildings, when it made its first two building purchases in 1990.
"You end up raising capital from family and friends until you get to the point where the business is successful and then the banks are willing to lend to you," Mr. Jost said.
Now 130 investors in Chandler Management own five buildings that generate $375,000 in monthly rent payments. Banks finance 80% of the company's real estate purchases, Mr. Jost said.
Mr. Dennis said bankers could refer entrepreneurs who need start-up capital to subsidiaries that offer equity or subordinated debt financing for small businesses.
Banks should also sponsor networking groups to help entrepreneurs find wealthy business owners with capital to invest in start-ups, he said.
"It's difficult," he said, but banks "need to be more alert and attentive. These businesses are going to be good customers." Corey J. Coughlin, president and chief executive officer of $154 million-asset First National Bank of Central Florida in Longwood, said he looks for outside investors or collateral with which to secure loans to start-up businesses.
"There are risks with start-ups that we aren't willing to take," Mr. Coughlin said. "It's very difficult."
Mr. Dennis said banks should try harder to serve rapidly growing businesses, especially service businesses, which typically have little collateral for traditional loans. Such businesses often pay higher interest rates, like those charged by factoring companies, and end up relinquishing some control of their firms in exchange for venture capital, Mr. Dennis said.
Jack Roeser, chairman of Otto Engineering Inc., an electronic switch maker in Carpentersville, Ill., said his sales grew more than 20% a year for 30 years but he scraped by without borrowing at first. "It was so difficult to borrow, I just did without," he said. "At times my suppliers carried me or went without getting paid for a year."
Now Otto Engineering has $36 million of annual sales and employs 380. Mr. Roeser said bankers call on him monthly to ask him to move his accounts.
Mr. Dennis also said banks should try harder to serve businesses that do not meet conventional lending standards. He said banks can charge higher rates to compensate for the risk of lending to less-creditworthy borrowers.
John VanWormer, president and chief executive officer of First National Bank of the Hudson Valley in LaGrangeville, N.Y., said his $750 million- asset bank makes loans guaranteed by the Small Business Administration and works with local development groups to serve businesses that do not meet lending standards.
"We'll try to share the risks," he said.
