Area businesses struggle to finance recovery

July 14, 2012|By ARNOLD S. PLATOU |

Several area businesses, forced to scrape for cash because their lines of bank credit were cut off during the recession, now face an even tougher situation — how to finance their recovery.

“Banks are decreasing their line of credit even to people who never missed a payment,” said Sandy Mehalko, director of the Small Business Development Center in Western Maryland.

Many business owners are having to dig into their own pockets to make it through these economic times because they can’t get the traditional means of financing, said Bill Fritts, a partner with the Hagerstown-based accounting firm of Smith Elliott Kearns & Co.

“Unfortunately, those pockets are a little thin because of having to dig deep over the past several years just to survive,” said Fritts, who works with many small-business clients.

The situation is the result of the declining values of the properties and other collateral that businesses use to secure bank loans, as well as today’s tighter lending practices, Mehalko said.

“It’s a tough problem,” said Ed Knox, lender relations specialist with the U.S. Small Business Administration, which works with the SBDC. Some businesses “are no longer with us, meaning they’ve either gone out of business or they’ve merged with another.”

The financial dilemmas are a Catch-22 for businesses and lenders, said Tim Henry, executive vice president of BlueRidge Bank, which is based in Frederick County, Md., but also has business clients in Washington County.

“As our economy starts to improve and sales start ramping up for everybody, all businesses are going to be looking towards lines of credit to support the business,” Henry said.

Even though the properties commonly used as loan collateral have lost a lot of value during the recession, and the economy still is uncertain and loan interest rates are low, Henry said some people might criticize banks for not continuing such loans.

There are ways banks can help, but with all that’s happened to the banking industry in recent years, “the banks are not in a position to take a loss,” Henry said.

“You, the local community, don’t want your bank to take a loss. Realistically, the last thing a community would want is for a local bank to go out of business,” Henry said.

On the line

For a business, a line of credit is vital.

It is “like a credit card,” Knox said. “So, for a $50,000 line, you can borrow against it, pay it back, borrow, pay it back.”

“Picture a contractor, a builder. They need lumber. They go to a local hardware store. They need $20,000 for the lumber. They spend the money. They do the project. They get paid for the project. They pay back down the line of credit,” he said.

Enter the recession.

“What we saw was, I guess, some of the banks doing their due diligence. They looked at lines of credit and some of the businesses weren’t doing as well as they did before” the recession, Knox said.

“People stopped buying, stopped building. So revenues go down. And then, the banks are concerned about that business,” he said.

“The other thing banks look at is, what collateral is backing that loan? Typically, that is the home of the small-business owner,” he said. “By ‘small,’ I mean you could potentially be doing millions of dollars a year in revenue.

“Their business may have a building. When the economy collapsed, the equity in both (the owner’s house and the company’s building) of them went down.

“You know what housing did — your house was worth a quarter of a million dollars (before the recession). Now, it’s worth $175,000. You may be underwater at this point,” owing more money to the bank than the house now is worth, Knox said.

“So the bank, they thought you had all this equity. Now, all of a sudden, you’ve got nothing there. So again, you make it (the loan) more risky for the bank,” he said.

As a result, the banks might have immediately limited the lines of credit at whatever the amount each business owed at that moment, Knox said.

So if a business had been approved earlier for a $50,000 line of credit, even if it had only borrowed $30,000 of that, “the bank may have capped it at $30,000” and switched that debt to a term loan, due to be paid back in a certain period, Knox said.

In effect, he said, the business is cut off from its line of credit.

“Once you pay it off, that’s it,” he said.

“If it’s a business person like a builder that’s used to accessing that line of credit to buy their material, it makes it a lot harder for them to do a job, especially a bigger job,” he said.

These are the sorts of problems common to almost every business in almost every part of the nation, said Knox, whose office is in Baltimore.

“Western Maryland is typical. Did the housing market go bust out there? OK. Same as pretty much everywhere,” he said.

‘Uphill battle’

Tim Campbell has guided Callas Contractors Inc. through the recession’s tough times.

Thus far, Callas has “been holding our own. We have a very good relationship with our local bankers,” said Campbell, who was named president and chief executive officer of the Hagerstown company in 2005.

But he knows that some others in the industry have lost their lines of credit during the recession.

“I’ve seen it among subcontractors and other companies,” he said.

“It is true, the new rules that the banks have to follow, and it’s making it tough out there. Bonding companies want to see these lines of credit in place, too, and you can’t get that” bonding without the credit approval, he said.

Nowadays, most of the work done by Callas, which was founded in 1958, is commercial and industrial construction.

In those business areas, Campbell said, “it’s usually 30 to 45 days after you submit an invoice that you get paid. So you have to have enough cash flow to keep that going, to pay all the salaries and keep things going” until then.

That’s where a line of credit is important.

While Callas has maintained its financing arrangements, it has been affected by the recession, he said.

It has had to lay off 60 to 70 employees — about half of its work force, Campbell said. Still working are “probably 15 in the office and 45 or so in the field,” he said.

Thinking of those who have been laid off is hard, he said.

“Just think of the 60 families now that have had to scrape and try to make it, and whatever they would have contributed to the economy now. And you think how far it expands into their family. It’s tough.”

Campbell, who recently returned from the national legislative conference at the Associated Builders and Contractors’ national convention in Washington, D.C., said the industry’s immediate outlook doesn’t look good.

“Nationally, they took some polls ... The pessimism has actually increased since February,” he said. “So, here we are in summer and we should be all busy. And the owners of these companies are still not feeling the improvement.”

Joan Warner, management and education consultant for ABC’s area chapter, said the recession has caused such problems as shrinking lines of credit, rising competition for what work there is, tighter profit margins and more layoffs.

“It’s even affected our school here,” Warner said of the chapter’s Barr Construction Institute, which provides training for apprentices in several trades. “With some of them (students) being laid off, they aren’t coming back to school as they had.”

The school’s enrollment has dropped from about 160 students two or three years ago to “probably about 140 to 150 students now,” she said.

In the chapter’s Maryland, West Virginia and Pennsylvania areas, “we’ve actually had contractors — large contractors that were very large charter members of this chapter, that have been here 50 years or longer — that have gone out of business” during the recession, she said. “It’s a tough uphill battle for these contractors.”

Holding on

For businesses wanting to bid on new projects, the effect of being cut off from a line of credit might be paralyzing, according to Mehalko, Henry and Fritts.

“I’ve got a few contractors that have gotten projects, but those line of credits have either been tapped out or cut off or revoked,” accounting partner Fritts said.

“In one case, I have a (business) who got a client. The business went to the customer and were able to negotiate with them an advance on the contract that would give them the cash flow to go buy the materials so they could do the contract,” Fritts said.

“Now, those customers are few and far between,” he said.

Fritts said there are a lot more kinds of businesses than just building contractors that are being hit with the loss or reduction of their line of credit.

“It is a wider range of businesses. Just because of the general economy, everybody’s cash flow has gotten squeezed,” he said. “It could be anything from retail to wholesale companies, and even in the service businesses,” such as lawyers and insurance companies.

The number of businesses affected is large, he said.

More striking is that because of the rigors of the recession, the companies that still are surviving and, therefore, the ones that are being hit by the losses of the lines of credit, are the ones “that managed well,” Fritts said.

How much longer can they hold on?

That depends on each one’s personal resources, Fritts said.

Many already are tapping into “personal savings, (and) tapping into retirement accounts, in some cases,” he said.

Looking for a guarantee

So, how does a business that has lost its line of credit regain the financing it needs in order to take advantage of any sign of new life in the current economy?

There are at least two answers — trying to get an SBA loan guarantee and/or trying harder to secure a bank loan. Both solutions depend greatly on the businesses working to improve their relationships and trust with lenders.

Increasingly, many local businesses are turning to the Small Business Development Center for help, director Mehalko said.

“We’ll help them get a business plan written, including all the (business) projections. We talk to them about credit and equity and collateral,” she said. And then, the client applies for a bank loan.

The Small Business Administration can help encourage the bank to make the loan, Knox said. “What SBA can do, we provide a guarantee to the bank. Depending on the loan program, it can be anywhere from a 50 percent up to a 90 percent loan guarantee.”

The guarantee helps when a bank doesn’t think a potential borrower has enough collateral, Knox said. Then, if the loan is approved and guaranteed and the borrower defaults, he said, the SBA will pay the bank a percentage of the amount in default — after the bank has liquidated whatever assets there are.

In the past fiscal year, from October 2010 through September 2011, there was a sharp increase in such guaranteed loan programs in his district, Knox said. The district includes every Maryland county except Montgomery and Prince George’s counties.

“I’ve seen a lot more lenders looking at SBA. Last year for our district was the highest volume of dollars for SBA loans that I’ve seen in 12 years,” Knox said.

In all, he said, there were more than $204 million in loans with SBA guarantees in the district in that year, he said. The previous year, such loans in the district totaled just $125 million, he said.

Knox said the total amount of such loans in Western Maryland has jumped a lot, too, though offhand, he didn’t have figures comparing it to previous years.

Of the $204 million, there were $6.6 million in such loans given in Washington County and $10.2 million given in Frederick County, he said.

Two-way street

In a way, the recession has given both lenders and borrowers new ways to take a measure of one another — a process that might be helpful to some businesses that need new financing now, banker Henry said.

Lenders have had the opportunity to see how well a business has made decisions and dealt with responsibilities during tough times, Henry said.

“And, similarly, these businesses can see how other bankers react in tough times. It goes both ways,” he said.

It might sound self-serving for a banker to say this, Henry said, but the best way for a business to earn a lender’s trust in tough times is to work step by step to show that every care is being taken.

“It can be done that a banker and a company can work closely, much more closely than before the recession” to establish a new lending relationship, he said.

“It can be done, working closely with their banker that they have a relationship with. It is working closely so the banker knows the borrower and the borrower knows the banker.”

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