The banks kept turning him down, and Samuel Demisse couldn't figure out why. Demisse, the owner of a Baltimore-based coffee bean import business, believed he had proven his business acumen by carefully managing costs and expenses. Consumer demand for specialty coffee was growing, orders for the pre-roasted beans were pouring in from customers in the United States and abroad, and supply from Ethiopia was robust.
But without credit, Demisse had no way to order another shipment of beans — and had no inventory to sell. When a nonbank, private lending group offered him a $75,000 loan three months ago, Demisse jumped at the opportunity, even though he had to pay twice as much interest as he would have with a conventional bank loan. The lender, Atlanta-based Funding Strategy Partners, agreed to the loan after reviewing the company's list of customers and noting that sales volume had tripled this year over last year.
Without the loan, Demisse said, he would be struggling for survival. "It would be really tough," said Demisse, whose four-year-old company, Keffa Coffee LLC, is based in White Marsh and rents warehouse space in Dundalk. "Capital is the blood of any small business — to have inventory, to pay the bills, to keep the lights on."
While the credit crunch has put a crimp on consumer borrowing, it has taken an especially heavy toll on small businesses. With the financial crisis prompting banks to tighten lending criteria, access to credit has become one of the biggest challenges small-business owners face in a troubled economy. Even growing businesses often do not qualify for bank loans because of declining values of collateral, such as an owner's home, commercial real estate or business equipment.
To fill the void in bank lending, small businesses are exploring loans from alternative sources: nonbank, private lenders, nontraditional forms of financing such as factoring, expansions of government-backed business loans, and strategic alliances between large and small businesses. Some of the alternatives come with high costs, even for companies with stellar credit.
Christian Johansson, secretary of Maryland's Department of Business and Economic Development, says he talks to business owners every day who can't get a loan or line of credit. "They have good credit, but they can't grow or expand," he said. "This crisis was created in other places, [but] it's really affecting Main Street America. Small businesses without the reserves of larger businesses were less prepared to weather the storm we've been through."
Lack of credit has left some small businesses struggling for day-to-day survival. Others have put plans on hold to expand or hire.
Access to capital for small businesses is not nearly as available as credit for larger organizations, said Craig Panos, a business counselor with the Maryland Small Business Development Center. "There have been programs targeted to [small firms], but they have not been sufficient for most of these businesses."
Many small firms would have "sailed through" the underwriting process two years ago and by "normal" standards should be getting loans, Panos said, but are not because banks' underwriting standards are now so strict.
Maybe help's on the way
Small-business advocates hope capital will start to flow more freely in the wake of Congress' passage last month of a small-business tax and lending assistance bill, signed into law Sept. 27 by President Barack Obama. Supporters say the mix of tax breaks and improved access to credit could save many small-business owners from bankruptcy.
Bob McMahon, president of Aegis Factors Inc., based in Fort Myers, Fla., said the recession and lack of traditional financing had renewed interest in the type of capital he offers. As a factoring company, his business purchases accounts receivable or invoices from businesses at a discount, giving them an immediate infusion of cash to keep operating.
"We're seeing more and more interest from … businesses being started by people who can't find jobs," McMahon said. "Even the newest businesses can factor, as long as they're dealing with creditworthy customers." Factoring companies review the creditworthiness of the accounts — not of the company selling the invoices.
Joe Holland, president of Columbia-based Holland Construction, provides another type of unconventional lending. Tired of seeing projects he was about to start for small-business clients go nowhere, Holland put in place this year a program that offers customized financing plans.
The commercial contracting company — which works with owners or investors in office buildings, shopping centers, health care facilities, schools and libraries — has deferred client fees in some cases and also established ownership or equity positions in projects, working out arrangements on several endeavors in Maryland and Pennsylvania.