Small-business owners face challenging economy

Small-business owners face challenging economy

By Robert Bell Friday, 17 April 2009

Credit proving difficult to come by for some, stimulus incentives aim to increase SBA lending

For small-business owners, access to credit can sometimes serve as a lifeline to stay afloat. At other times, it is an essential nutrient for continued growth. These days, credit can be tough to attain.

Several measures included in the American Recovery and Reinvestment Act — commonly known as the stimulus package — are designed to ease the burden for both small-business lenders and borrowers.

Oscar Paredes is co-owner of Leander Signs. Toward the end of last year, he and his partner, Luis Parada, were looking to acquire another piece of property for their business.

“Our credit is really good, and we had never had any issues with any loans or lines of credit,” Paredes said.

“But that time we went to probably, at minimum, five different banks and finance companies, and we could not get the funding that we needed to make that transaction. That was one of the indications to me that things were not good,” he said.

In addition to causing problems for Paredes, another outcome of the credit crunch is slower job growth. Small businesses have, from the mid-1990s to about 2005, generated 60 to 80 percent of net new jobs, according to the U.S. Small Business Administration. Overall, small businesses employ about half of the private sector employees in the country, according to the SBA.

And when businesses such as Leander Signs cannot get the credit they require to, for example, purchase a new building, job growth slows.

The economic downturn, however, has provided a boost to business for Leander Signs. Because of the tough times, more people are trying to do everything they can to get in front of clients or potential clients, Paredes said. That means a lot more signs, banners, business cards and door hangers.

Cautious calculations

Credit for small-business owners is “paramount,” said Larry Lucero, director of the small business development center at Texas State University – San Marcos. The SBDC, which also has an office in Round Rock, covers a 12-county area and offers consultation and a variety of services for entrepreneurs.

“Lines of credit, loans and other types of financing need to be available so [businesses] can continue to grow and hire people to do the job,” Lucero said. “That’s what creates economic vitality.”

Among big national banks, lending is down in large part because of the economic turmoil of the last 18 months.

“They’ve been very, very cautious about making any SBA loans, or any loans to small businesses for that matter,” he said.

“Everybody’s on pins and needles,” he said. “We’re waiting to see what’s going to happen in the credit markets, and [lenders] are unwilling to stick their necks out if they feel like they’re going to be taking a significant risk.”

Small-business loans through Frost Bank are down slightly compared to recent years, but are steady overall, said Marvin Rickabaugh, Austin region president for the bank. Frost makes SBA loans, and Rickabaugh said that although many borrowers are being more cautious lately, people are still applying for loans.

Challenging circumstances

The lack of credit is affecting some business owners indirectly.

Seth Bloomquist and his family own Arise Air (formerly AC Depot) in Cedar Park. Though his own business has not had trouble with lines of credit, many of his customers have.

Even secured home improvement loans are very hard to come by, Bloomquist said.

“We would like to have some new credit lines, but we haven’t even gone looking, seeing how the economy is — or the way people are,” he said. “Everybody’s scared.”

Bloomquist said his business’s lines of credit are good because they were secured about three years ago, before the recession started.

“If this crisis had happened two years ago, we probably wouldn’t be here now,” he said.

Stone Ranch Media is also dealing with customer apprehensions, owner Dusty Green said.

“The big challenge that we face right now as a video production company, or multimedia company, is getting people to get over their own fears,” he said. “We rely on people who are actively marketing something. Typically, when times turn bad, and understandably so, one of the first things businesses tend to cut is marketing.”

Green has also experienced the tightening of credit.

“We’ve had our credit lines reduced somewhat, through no fault of our own, and the bank told us as such. But at the same time it hasn’t been a problem for us because we carry very little debt, and we rely very little on credit.”

To an extent, the challenges of the recession and credit crunch will affect different types of businesses in different ways.

“People will always get married, so I don’t know that I’m being affected,” said Sherry Ayles, owner of Customary Couture.

Ayles opened her bridal shop in July 2008 and does not have much to compare the current climate against. But, she said, some of the vendors she does business with have had to adapt.

“My manufacturers are being very lenient on minimum orders because in bridal, you buy minimums every season. And they’ve been taking into consideration the economy and letting us buy fewer minimums than what we normally do, which is nice,” Ayles said.

Credit has not been a challenge for her, either. She started the business with money she had saved and has gotten many bank loan offers.

“I have had banks come in flocking to my store, [saying,] ‘Please, open an account with us. Let me give you a credit card,’” she said. “I have not had any negative impact at all.”

Though the wedding industry moves forward despite recessions, the construction industry is one that is affected more profoundly when the economy slows.

Austin Wood Recycling, which has locations in Cedar Park and Austin, clears construction sites and grinds the wood from them to create mulch and composting products.

The recession has meant fewer construction projects and, therefore, less potential business for the wood recycling outfit over the last several months, said Jerome Alder, company president.

A more limited number of jobs means more competitive bidding and thus thinner margins, Alder said. The company has had to run more efficiently with fewer resources, cutting back on the number of employees and overtime, he said.

However, Alder believes construction — and business for Austin Wood Recycling — will pick up relatively soon.

“Things are tight, but I think it will get better,” he said.

Business owners are telling advisers with the San Antonio branch of the SBA a similar story regarding the economy.

“Right now, what we’re hearing is that it’s a difficult time,” said Lucy Salinas, business development specialist with the San Antonio SBA.

“[Business owners] are feeling the credit crunch, across the board for most businesses,” she said. “They tell us the same thing, that lending has gotten tight. A lot of these are small- to medium-range businesses that are established or in the growing stage.”

Salinas said it was vital for small-business owners to be able to demonstrate to lenders that they have collateral and that their business has strong cash flow.

Capital Certified Development Corp., which has offices in Austin and New Mexico, helps connect small-business clients with lenders, specifically with SBA 504 program loans.

Over the last six months, CCDC clients have been a little more tentative about borrowing, said Kathy Mayfield, Austin regional manager. Clients are taking a little bit longer to make decisions and being a bit more cautious, she said.

Some clients, though, are eyeing property and other big purchases, many of which are available at much lower prices these days.

“I think a lot of them are looking at this opportunity to take advantage of great deals out there because when they can buy a building that they maybe couldn’t have bought a year ago, it’s a good time for them to buy,” she said.

Some incentives included in the stimulus package, such as reduced or eliminated fees, will also likely prompt small-business owners to grow, said Ross Wood, manager of corporate communications.

“Sometimes, downturns like this push more business to us potentially,” he said.

Small-business lending, tax breaks in stimulus

The stimulus bill provides millions of dollars for SBA lending, as well as tax breaks and other incentives.

• $375 million will be spent to temporarily eliminate fees on SBA-backed loans and raise SBA’s guarantee percentage on some loans to 90 percent.
• $255 million will be allocated for a new loan program to help small businesses meet existing debt payments.
• The ceiling on the Section 179 tax break, letting companies expense qualified assets in the first year of service, has been increased from $133,000 to $250,000 in the first year that assets are placed in service.
• Businesses will again be able to take an additional bonus depreciation expense of up to 50 percent of the cost of newly acquired fixed assets.
• A business that incurs operating losses in tax years ending after Dec. 31, 2007, can offset such losses against income earned in prior years and obtain a refund on previously paid taxes. Losses can now be carried back for five years instead of two.
• The depreciation expense for passenger vehicles in their first year of service, limited to those placed into service in 2009, was increased from $2,960 to $10,960.

Source: U.S. Small Business Administration