Thomson Reuters reports that U.S. small businesses borrowed 18 percent more money in January than recent trends have indicated, what experts would take as a sign of recovery. Yet as Bloomberg Businessweek suggests, things aren’t as good for small business in the U.S. as they may seem. According to small business owners like Tim Erven of Custom Gaming in Whippany, N.J., profitable businesses are being turned down for bank loans with regularity.
Positive revenue, negative reception
Erven, 22, has been operating his custom gaming controller business for five years. His business, an Amazon.com storefront that fills an average of 250 orders per week, has reportedly been profitable since its inception, and it created $300,000 in revenue in 2011.
Yet Erven has found it impossible for a bank to lend him even $10,000 to improve his company’s website or rent a warehouse. He has approved six banks to date, notes Bloomberg, and each time his application for a small business loan has been rejected, even though his parents have expressed the willingness to put up their home as collateral. The reasons for rejection reportedly include Erven’s age and the fact that he’s never received a small business loan before. As a result, he has had to juggle balances on six credit cards for business cash flow.
“From what the banks told me, asking for 10 percent of my annual revenue was reasonable, and what tends to be conventional, but even by decreasing the amount I was seeking, I was still unable to obtain approval,” said Erven.
Small business in the post-crisis era
According to a recent study by the National Federal of Independent Business, Erven’s situation is far from unique. Demand for credit on the part of small businesses has trended upward, yet the number of loan approvals has not kept pace. According to Federal Reserve quarterly survey, bank credit approval for small business outfits with annual sales unless than $50 million increased a little since the third quarter of 2011. It’s still far below where it should be, notes Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C.
“Before lending will rebound, consumer spending and real estate prices have to improve,” said Merski. “And tempering new underwriting rules is crucial, too.”
Losing business to China
Federal Reserve Chairman Ben Bernanke recently called for a “delicate balance” between more bank lending and strong lending standards. Unfortunately, entrepreneurs in need like Erven aren’t planning to wait for U.S. banks to figure out the balance. He plans to meet with Chinese private investors about raising capital and even moving some of his production to China.
“I’m either going to have to give a portion of the company or pay a high [interest rate],” says Erven. “I’d be able to get a much lower rate [from a bank], but that’s the reality of what I have to do to get the funding.”