In the News
![Text Box: Launching a small business is challenging in the best of times.
Imagine what budding entrepreneurs face when approaching traditional lenders in the hope of launching their dream venture in the current credit crunch that is bringing some of the nation’s biggest corporations to their knees.
"A year ago, it was hard but not impossible — if you had a good relationship with the bank, repaid loans in the past and your personal expenses were under control," says Charles Edmonds, a Fort Worth business broker.
"Today, if you had to borrow all of the startup capital, you just can’t unless you had collateral, like a CD in the bank or real estate." And that’s hitting home for some would-be local entrepreneurs.
Dream Venturini was about to sign a lease and open an Arlington day spa when her bank suddenly demanded that she double her equity stake from 10 to 20 percent before it would extend a loan.
Yaw Asante, an engineer-turned-business consultant with an MBA, specializes in advising people who want to start small ventures on ways to raise capital, including bank loans. So it was a shock when Asante himself failed to get a loan promised by a national bank to help him buy an existing and profitable retail business, a pack-and-ship store in Carrollton. Then a second national bank, from which he had requested just half as much, also turned him down. Venturini said she lost the retail space and is still seeking financing.
For Asante, raising capital became a professional challenge. He figured that roughly $100,000 was required. And in the end, he managed to open his business, The Mailroom, using equal parts ingenuity and equal parts lenders’ blind spots. "It was interesting," he said. "I took a step back and looked at the resources I had."
Putting it in the bank
Instead of requesting a business line of credit, Asante applied for personal lines of credit from three banks in quick succession, and drew $68,000 before the hits against his credit score were registered. Then he advanced himself cash on personal credit cards to the tune of $20,000 and got the remainder from savings to raise $108,000. "I think I can recoup it all in less than three years, which is better than investing anything on Wall Street — even before this crisis," said Asante, whose wife will help him operate the business while he continues his consulting business. He figured that the retail shop was a good gamble, considering the previous owner had gross sales of $189,000, from which he had cleared about $50,000. Asante plans to run the business for three months without changes, then add services like helping customers place, sell and ship auction items on eBay.
Day-care dilemma
Teshia Kyser has a master’s degree in education, 10 years’ experience as a secondary-school counselor, owns two rental houses and operates a food concession business at youth sporting events with her husband, a Dallas/Fort Worth Airport firefighter with a business degree.
Their plan was to open Brilliant Minds Daycare Center in an underserved area of Arlington with about $50,000 in savings and $300,000 in loans. It would be near a large educational institution that has an 18-month waiting list, so Kyser knows that there’s pent-up demand in the area.
The Fort Worth Business Assistance Center linked her up with a Minnesota firm, First Children’s Finance, which specializes in underwriting day-care centers. First Children’s is willing to lend $125,000 if a commercial bank provides the rest of the borrowed funds.
Conventional wisdom is to approach the bank where the prospective borrower has done his or her personal or business banking and has a relationship. The Kysers deal with two of nation’s largest banks. Yet, after being told that their credit was excellent, the couple never got a call back from either. Having started in August, Teshia Kyser is still negotiating with two Texas banks, both of which say they will extend loans if the couple put down 30 percent in equity. And that’s the problem. Kyser said she could increase her personal investment from 15 to 20 percent, even using their rental property as collateral but can’t go higher. "They’ve had my papers for a month, but I feel like I’m getting the runaround, and it’s really really frustrating," she said.
What’s happening
All of the banks Kyser approached insist that they are still making Small Business Administration program loans. So the battered economy is not an issue, she was told. However, the number of the benchmark 7(a) SBA loans declined 23 percent in value during the 12-month period ending Sept. 30 in 77 counties of North Texas, dropping from $611 million to $469 million, the federal agency said. But at least half of the drop could be attributed to revised SBA procedures, said Don Hankins, a Fort Worth business broker, who attributes the rest of the fall to a tightening of the credit market. The state’s top SBA loan provider, JPMorgan Chase, issued roughly one-third fewer loans compared with the same period the year before, 547 down from 835, translating to $38 million, down from $56 million. "Chase is proud that we’re the No. 1 SBA lender in the Dallas-Fort Worth district," said Greg Hassel, a Houston-based spokesman for the bank. "Our numbers declined versus 2007 — as did the overall SBA market." But Hassell added: "We are more cautious in reviewing credit in these difficult economic times, but we continue to extend credit to businesses in North Texas."
Filling a void
Not all banks are following that trend. Wells Fargo, whose SBA lending in dollars dropped just 6.7 percent, insists that it is very keen on extending such loans. Dwight Hilton, the bank’s regional sales manager for SBA loans, said that on a statewide basis, such lending by Wells Fargo has actually increased.
The reason? The California-based bank is filling a void left by rivals in several regional markets, including Texas, that have either cut back such lending or have gotten out of the niche altogether, said Hilton. He cited one bank whose SBA loan staff was downsized from 15 to one while Wells Fargo has added five staff members in Texas during the past 16 months and is looking to recruit another banker. "Actually, we’ve started a campaign to let people know that we’ve maintained our steady lending policies for the small-business owner in light of the void left by those lenders that left market or pared back." SBA 7(a) loans issued in North Texas by Bank of America dropped a whopping 66 percent for the 12 months ending Sept. 30, falling to $2.4 million from $7.2 million.
Tara Burke, a Bank of America spokeswoman, said such loans represent a small percentage of loans to modest-sized businesses, adding that the "number of loans change year by year depending on market conditions." She declined, for competitive reasons, to quantify those other types of lending.
Uphill climb
Still, there’s no disputing the overall difficulty faced by people trying to finance a small business. Hankins of Alamo Corporate Group said, "There had been a half a dozen lenders who would do every deal we took their way. Now we have to go to 20 institutions before the deal is done. It’s tougher now, no doubt about it. But the deals are still being done."
Another business broker, Ed Kasper of Kasper & Associates, said he’s finding banks willing to lend if, typically, the collateral is 50 to 60 percent of the total purchase price, they receive 20 percent equity from the buyer’s savings and the remaining 20 percent is seller-financed. "When a client offered to put in 12 percent equity, the bank came back and said they needed more. They are more cautious, like everybody now."
Brian Happel, market president for Compass Bank in Fort Worth, acknowledged that many banks have stiffened requirements and advised new entrepreneurs to find a banker with personal experience in the local market who has lent to similar businesses. Find out how they structured those loans, he said. In some cases, Happel said, "You might be better off negotiating with the seller." He cited a scenario where a person intends to buy a business with 20 percent from savings and 80 percent financed by a bank. But the bank demands that the borrower invest 30 percent. In this case, the buyer might offer the seller a higher price if he or she carries some of the 30 percent.
"Almost every SBA loan will have a piece of 'seller carry,” said Douglas Dickey of Houston-based DRDA, a Houston accounting and business consulting firm. "If a seller has a little skin in the game, there’s more value in the transaction for the lender, especially if the seller doesn’t get paid until SBA gets its due. A 10 to 20 percent carry is not unusual in today’s world. You might see it go higher than that."
Success story
Tim and Tom Bates, brothers who launched Glendarroch Homes two years ago, have managed to maintain their lifeline of credit despite the housing-industry crisis. Initially, the two Texas Christian University graduates had trouble finding a lender. "We met with five different banks, three of which were small local banks and the other two were large commercial banks," Tim recalled. "It was just like the TV commercial where the big ones don’t have time for you. We were completely blown off. They didn’t even tell us if we were declined. And one of them was the bank where I did all my personal banking and my father, too." It came down to a pair of smaller banks. One of them insisted that the brothers build just one home at a time. "You can’t run a construction business doing one house," he said.
Tom had 10 years’ experience as a general contractor for Meritage Homes, supervising the construction of 15 houses at a time. They found an outside investor who lent them about two-thirds of their startup funds, with the two brothers putting up the rest. One local bank finally gave the brothers a chance, and it has continued to stick with Glendarroch, which includes Tom’s wife, Jennifer. The way they operate, each project has a new, collateralized loan.
The brothers take five or six draws from it over six months — one for the lot, then another for construction costs, and so on, said Tim Bates. "If the lot, say, costs $100,000 and construction runs $500,000, we would put up $50,000 and the first [loan] draw would be $50,000." Crucial was Tom Bates’ experience with Meritage. Bankers typically say that hands-on industry experience is of major importance in deciding whether to issue a loan.
Meanwhile, Teshia Kyser has not given up her dream of opening a day-care center, although she has given thought to paring down her original 5,000-square-foot concept and finding ways to reduce startup and finishing-out costs. "I am fairly optimistic and thinking positive," Kyser said.
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