Banks Tighten Loan Requirements 

Local business and real estate investors, tangled in red tape, seek creative ways to get financing.

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When Fred Fassett was ready to expand his printing business, he found the perfect opportunity to do so: A colleague at the Berkeley businessman's Rotary chapter was retiring, and was seeking to sell his Minuteman Press franchise. The pair struck a gentlemen's agreement in early 2008, and they only needed to find a lender to finalize the deal. But in the midst of one of the worst recessions in memory, that proved a lot more challenging than either had anticipated.

"Nobody realized that early quite how bad everything was going to get," remembered Fassett, who has been in the printing business for 35 years.

The first bank Fassett approached — a San Jose bank that the Minuteman organization worked with to help put together financing for such deals — collapsed before the loan could be approved, he said. So Fassett turned to Bank of America, where he was a regular customer. But there, too, he came up empty. Finally, he called Mechanics Bank, which funded a loan in January 2009, nearly a year after he started work on the deal.

"They didn't give me a deal anywhere near as good as I had hoped for," said Fassett. [But] in the end, they did come through with something that I could swallow."

While the recession begins to abate, banks are once again starting to lend for real estate deals and business transactions. But investors in those areas say that new loan criteria set a bar that's too high for them to jump.

"The reality is, banks and insurance companies have a ton of money," said Stephen A. Cowan, managing partner of the San Francisco office of the global business law firm DLA Piper. "But they can't find product because they aren't willing to lend at 100 or 90 or 80 percent loan to value anymore."

Cowan's firm recently released a "State of the Market" survey that showed commercial real estate executives are optimistic about the market despite massive, ongoing vacancies and some $150 billion in commercial loans set to come due by 2014. But the reality, says Cowan, is that deals aren't happening in part because banks want buyers to have more equity to invest in commercial properties they're seeking to purchase.

And smaller business owners and the local trade organizations that work with them say they are being asked to provide collateral — often their homes — in order to get loans to move their business forward, and that they need to provide more evidence of their creditworthiness than ever before.

But with property values still well below the peak at which many bought, and business hitting a recessionary skid, business owners say they lack the collateral and the creditworthiness to get the money they need. So increasingly, they are looking for alternate funding sources to expand — or just to stay alive.

Robb Ratto, executive director of the Park Street Business Association in Alameda, says the businesses he works with are frustrated with banks. He says a number of Alameda business owners have sought out bank loans to expand their businesses, only to become entangled in a sea of red tape. "It's almost like they want the first-born child from everybody," he said of the banks. "It's so daunting to try to put together everything that they want while these people are also trying to run their business and deal with their families and everything that most of them have just quit in the middle of the process."

Duane Irwin, who owns Lee Auto Supply in Alameda, says he had to sell his house in order to pay his bills, including back taxes on his business, because he can't get money from a bank. He says he has also relied on credit cards to get cash — though they can carry an interest rate of 20 percent.

Irwin says he can't get a bank loan because he has bad credit and because his business is way down — making him even less creditworthy. "When your business is hurting, nobody loans you money," he said. "The banks get bailouts, but small businesses don't."

The banks say they're just responding to government pressure to lay down more stringent lending requirements. They have money and are ready to make loans, under the right circumstances, they say.

"Some businesses see that banks have clamped down on credit standards," said Beth Mills, spokesperson for the California Bankers Association. "But where there are creditworthy and responsible borrowers, banks are ready to make those loans."

But business owners that can't get them have had to locate cash in other places — or close up shop. "We have seen a number of small enterprises close their doors — mostly restaurants and small professional firms," said Jonathan DeYoe, chairman of the Berkeley Chamber of Commerce and owner of DeYoe Wealth Management. "And those businesses that have survived have had to get creative."

DeYoe said the business owners he's talked to have tapped credit cards, home equity, retirement accounts, and friends and family to keep their businesses going. Even with a bank loan, Minuteman's Fassett says he had to reach into his retirement fund last year in order to keep his business going. "You do what you gotta do," he said.

Brad Kofoed of Mom Invented, a global retail and business advice web site based in Walnut Creek, says he and his wife, Tamara Monosoff, obtained loans from angel investors and friends and family to get part of their business going. He says new businesses had a tough time getting bank loans before the current credit crunch, and getting that money has only gotten tougher.

Kofoed says he has seen other business owners use a variety of methods to obtain cash, from credit cards to reaching out to suppliers for financing and taking loans on their receivables, a process called factoring. He said some business owners are even bartering their services to get by.

Microloans are another source of cash. Kofoed and his wife got help from TMC Development Working Solutions, a San Francisco-based microlender that offers a handful of loans a year.

TMC's Executive Director, Emily Gasner, says she expects to hand out two-dozen loans of up to $25,000 each this year, to new or growing businesses that lack access to bank loans because they lack collateral, a track record, or good credit. TMC also provides mentoring for the businesses they lend to.

Since beginning in 2005, TMC has lent out $1 million, and enjoys a 98 percent repayment rate, according to Gasner. But the nonprofit is careful to select business owners it thinks will succeed. For example, one of its lending criteria is that the business owner needs to have industry experience in his or her chosen field.

Gasner says she's now seeing people in more dire financial straits than when the lending program began. And she says business owners she's working with have seen traditional money sources like bank lines of credit and credit-card financing dry up.

As a result, she said those business owners are working harder to perfect their product and marketing pitch. And they, too, are being creative about financing their businesses, bringing in product on consignment or offering ownership opportunities to friends and family members who are willing to invest in their businesses.

Despite the cash crunch, some are optimistic that things are improving. The Berkeley Chamber's DeYoe said that a number of local and regional banking institutions are looking to make loans, albeit to qualified borrowers.

"As the collective mood improves and as long as we avoid another catastrophe, it looks like the economy is slowly mending," DeYoe said. "As this proceeds, banks will loosen their purses a little and new businesses will be easier to finance ... but it will take time."

Kofoed, whose wife just released a new book, Your Million Dollar Dream, about starting a business, says that despite the credit crunch, he thinks now is a good time to start a business. He says that larger companies have pared back and are reluctant to hire, creating contract opportunities for entrepreneurs able to help provide the same service.

"People are financing businesses now by keeping their day job, being more frugal, and starting with contracts for companies delivering services they used to deliver," Kofoed said. "That's really what we're seeing."

And despite all the difficulties he encountered, Minuteman's Fassett says that he is one of the lucky ones. Business was down 40 percent last year, and while things are improving this year, he says he couldn't have survived if he had not expanded. "Quite honestly, had I not been able to do [the purchase deal], I might not be in business today," Fassett says.

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