THE ENTREPRENEURS

Shaking credit loose can be hard, and risky, for those looking to grow small businesses


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Six years after the onset of the Great Recession, a few things can be said about the small business funding environment.

Small businesses believe it's harder to obtain credit because banks have tightened lending standards.

Banks think they've loosened the purse strings and insist there's plenty of money to lend.

Regardless of which perception is right, small businesses are reluctant to borrow because the on-again, off-again recovery has raised doubts about whether the credit will boost their bottom line.

"Those are probably all accurate," said Stephen J. Gurgovits Jr., managing partner of F.N.B. Capital Partners.

The Marshall-based venture has been busy since September, when it opened its doors as a small business investment company licensed by the U.S. Small Business Administration. As a small business investment company, F.N.B. Capital can obtain up to $2 in SBA funding for every $1 of the $175 million it raised. The money is used to provide equity and debt funding to small businesses.

Mr. Gurgovits said F.N.B. Capital has closed four deals since launching, three in health care-related businesses and one involving a bolts and fasteners distributor.

"We see overall demand from small business as very strong," he said.

Several recent reports indicate that small businesses not only are starting to look for money to grow their businesses, more of them may be able to get the funds they are looking for.

Small business credit conditions improved significantly in the third quarter, according to Experian/Moody's Analytics. The two research firms said credit balances at companies with fewer than 100 employees expanded at the fastest pace during the quarter in at least two years, while loan delinquency rates declined.

"This is an indication that the small business lending market is starting to thaw after credit markets froze during the recession," Experian/Moody's wrote in its third-quarter report.

The head of SBA lending for Huntington Bank, the nation's third-largest SBA lender, agreed.

"We're seeing a lot more activity, and that's a good thing," said Craig Street.

It's been a long, slow road back for small businesses and the sources they rely on for capital.

Banks burned by loose credit policies going into the recession have been timid about lending coming out of it. The collapse of the real estate market hurt business owners who used their homes as collateral for borrowing. Even if they were in a position to borrow, the tepid recovery did not inspire confidence that the extra funds would generate a significant enough increase in their sales to justify the costs and risks of borrowing.

"While banks have gotten more restrictive, businesses have gotten more cautious," said Steve Rennekamp, owner of Energy Swing Windows. The 15-person Murrysville company manufactures, sells and installs replacement windows.

Fueling what some believe is an improving climate is an ample supply of capital that so far has not been matched by demand, according to Peter Lieberman of Schneider Downs.

"It's a very good time for a business owner to be looking for an investor," said Mr. Lieberman, who heads the regional accounting firm's corporate finance unit. "There's too much money chasing too few deals."

With a group as diverse as small business, it can be hard to reach a clear consensus. The number of small business owners who expect it will be harder to obtain credit in coming months is greater than those who believe it will be easier, according to the National Federation of Independent Business. The small business advocacy group said that sentiment has not budged much in the last few years.

Holly Wade, a policy analyst for NFIB's foundation, said not even the Federal Reserve's low interest rate policy has spurred borrowing. She said it's not because of an unwillingness of banks to lend. "It's that there are far less small businesses willing to borrow because they have not seen the increased sales like we normally would in a recovery," Ms. Wade said. "There are fewer takers than we would normally see for these loans."

In January 2012, NFIB reported that while banks believed credit conditions had improved or not changed over the previous year, small business owners believed conditions had tightened. Some still feel that way.

"It's much tighter scrutiny to get it and it's much tighter scrutiny to keep it," Mr. Rennekamp said. "If you've got some slippage, [banks] don't listen to many excuses. Whatever you tell them you're going to do, you better do."

Mr. Lieberman believes less creditworthy small businesses are having an easier go of it than they were a few years ago, when terms and conditions of loans were much more demanding than those provided to more creditworthy borrowers.

"The market has gotten frothy enough that the penalty is not as onerous as it was, but it's still there," he said.

For borrowers, some things never change. Lenders and investors want business owners who understand their business and have solid, disciplined accounting.

"I've never seen a really successful owner who didn't have a handle on their cash cycle," said Mr. Street. "The more organized they are with their financial reporting and accounting, the easier it is for us to work with them."

Denise de Simone, chairman of C-leveled, said entrepreneurs can arrange funding through several local sources if they have a solid business plan. The Bloomfield firm advises small businesses and startups on several issues, including funding.

"We're fortunate to be in a city where there are funds," Ms. de Simone said.

She said in addition to the traditional option of tapping family and friends, there's Innovation Works, which provides advice and funding to early stage technology companies. The venture has supplied over $52 million to 168 startups since 1999, providing loans that can be converted into stock. Those startups went on to raise another $1.4 billion.

Additional funding programs for smaller companies are available through two other Innovation Works programs, AlphaLab and AlphaLab Gear, Ms. de Simone said.

Some small businesses are eagerly waiting for the Securities and Exchange Commission to issue rules implementing 2012 legislation that was intended to make it easier for them to raise money.

The Jumpstart Our Business Startups Act makes it easier for small businesses to sell securities and frees more of them from reporting and disclosure rules enforced by the SEC. The act also regulates crowd funding, where small business will be able to use the Internet to raise up to $1 million annually. Investors will be permitted to invest up to 10 percent of their income annually in crowd funded companies and will receive certain information about the company raising the money before they invest.

The SEC put its proposed rules for crowd funding out for public comment in September and is accepting comments until Feb. 3. Some of those who have submitted comments so far say the requirements are too cumbersome and costly, while others suggest it will promote fraud, something state securities regulators are worried about.

There's also a concern that by giving shares to so many small investors, a successful crowd funded company may have trouble tapping additional sources of capital it needs to grow.

Ms. de Simone expects crowd funding will be of limited use because most entrepreneurs who have used it so far have raised only limited amounts of money.

"It is really good if you have a specific product, but I don't think it's something you can build a business on," she said.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.


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