A couple of weeks ago I wrote about a study the Cleveland Federal Reserve published suggesting that the small businesses that are the real job creators in our country will likely continue to struggle to find the financing they need to create jobs and help the economy grow. I don’t think there’s any question one of the biggest challenges facing small business owners—particularly those on the smaller end of the small business scale—is finding the cash to fuel growth and fund working capital.
Since 2008, banks have clamped down on their credit requirements, basically moving upstream to bigger, and maybe more lucrative fish—basically leaving the Main Street businesses you and I identify with, and former SBA Administrator Karen Mills, argues are 70 percent of jobs in the United States—out in the cold. According to the National Small Business Association (NSBA), accessing credit is getting easier for some of the larger businesses considered small businesses, but that’s not the case for many of the smaller Main Street type businesses we’re talking about.
Over the last few years, small business owners have turned to alternative lending sources to fill the gap left by the community bankers who chose to move upstream. This influx of non-bank dollars into the small business-financing world is bringing the costs down, but they are still more expensive than a traditional small business loan from the local bank.
I’ve expressed my opinion that community banks play an important role in local small business ecosystems and my concern that so few small business owners can turn to those sources of financing that were once such an important part of their success. I’ve also suggested that there’s more to a small business owner’s credit worthiness than his or her credit score, years in business, and annual revenue.
Of course, I’ve heard all the excuses. “There just isn’t demand.” “None of the small businesses you’re talking about are credit worthy.” “Our hands are tied by government regulations.”
Then I met Traci Flynn, a community banker with a community bank that takes a different approach.
Holladay Bank Trust in Salt Lake City doesn’t have branches all over the country—or even all over the city. They have one branch and were established in 1974 with a mission to serve their local community. A mission that is still important to the bank today. (In the spirit of full disclosure, they are one of the banks on the Lendio network of small business lenders. I was introduced to them because of the approach they take to small business lending, which I believe is a great example of what other community banks could do to breath life into the Main Street businesses that fuel our local economies.)
Over the last almost 40 years, the bank’s small business lending focus has been real estate-backed loans and they’ve become known for that expertise. In recent years, they started making more traditional SBA-backed small business loans within the 7(a) program (one of the most popular SBA programs). When I asked her what Holladay Bank Trust was doing differently from other SBA 7(a) lenders in the area, she said, “We work with a lot of small business owners who have good, healthy businesses, but aren’t perfect. They might not meet the restrictive standard of norms and requirements set by the bigger small business lenders in our area, but have proven to be great small business loan customers.”
When I asked her to get more specific about their approach, she said there were four key items they look for in their target customers:
Character and history: The last few years have been tough for everyone on Main Street. When evaluating a potential loan, she wants to know if the business has a good management team, are they current with their monthly obligations, do they have a good product, are they competing well within their market? Sometimes these indicators can mitigate a less than perfect credit history.
“If there’s a good management team and they have some of these other factors in place, we can make a case to the lending board that the business is a good candidate for a loan,” she said. “Of course there is a credit score threshold we won’t go below, but we want to make sure we’re doing the best we can for all the small businesses in our community.”
We appreciate what it’s like to be a small business: “Main Street business customers are what we’ve built our business on,” she said. “Although we do a lot of bigger small business loans, I’m just as happy to help the small business owner who is looking for $50,000. To a lot of the Main Street businesses in our community, that’s a big loan. We understand what it’s like to be the little guy—in some respects, we’re the little guy too.”
I recently read an article written by Ray Hennessey calling for the SBA to be abolished. As editorial director for Entrepreneur.com, I was surprised by his point of view because many of the small businesses he seems to distain, seem to be part of his audience—and they disagreed with him, I might add. There is more the SBA could do to encourage banks to accommodate small business owners just like what Holladay Bank Trust is doing. Processing the paperwork for a $50,000 loan is just as cumbersome and costly to the bank as a $500,000 loan. Which, the bankers at Holladay Bank Trust have chosen to do because they see the value within their local small business community. Streamlining that process by the SBA would be a great start.
Speaking of paperwork: It’s not uncommon for the months-long approval process to take its toll on a small business owner. What’s more, “Most banks are six weeks out before they’ll even talk to you about an SBA loan,” said Flynn. “Instead of sending the 20-page packet and wishing them luck, I try to meet with potential borrowers right away. Instead of expecting the small business owner to plow through a bunch of unfamiliar documents, I digest their financial statements and other documents and start the SBA forms myself. That way, the next time we meet, we can fill in the blanks and try to shorten a very lengthy approval process.”
It’s been said, “Time is money.” This is particularly true when applying for a small business loan.
Community lending decisions are made in the community: Of course this is problematic for bigger banks, but the approval process begins and ends within the walls of a single Holladay Bank Trust office. Everyone involved in the lending process is under one roof, part of the same team, and invested in helping the small business community in their community.
Of course Holladay Bank Trust might be on the smaller end of the small business lending continuum, but I think they’re on to something. It reminds me of what it was like earlier in my career. Our banker was familiar with our industry, he knew my partners and myself, and liked to do business at our office. When we needed cash, he made it happen. I have to admit; I probably took him for granted because I didn’t know just how rare that was.
Access to capital is one of the biggest challenges small business owners face, I’d love to hear from other traditional lenders who are helping the Main Street business owners in their community.