Small Businesses Struggle to Find Credit in Post-Recession World

money in the hands

With bank loans still hard to come by, many businesses are imitating tactics that consumers have adopted in recent years to weather economic uncertainty.

They're postponing unnecessary expenditures, paying bills more slowly, reducing debt and finding different ways to keep money coming in.

Since the 2008 recession, businesses have had a harder time qualifying for bank loans, which they often need to grow and expand. With the economy worsening, banks wanted to ensure that businesses could repay the money.

Although there are some signs that access to bank credit has loosened, especially in the past year, many businesses still perceive that loans are hard to come by. In October 2011, for instance, the Federal Reserve reported in its Beige Book -- its anecdotal round-up of business conditions -- that "loan standards were described as still tight for many classes of borrowers" and that demand for business loans was flat or down.

That description rings true to Becky Sturm, owner of StormSister Spatique, an online retailer of health and beauty products in St. Paul, Minn. Last year, she sought a $20,000 loan from local banks to develop a new organic shampoo, shower and shaving bar, but banks turned her down -- even though she had done business with them in the past and had no history of defaults or bankruptcies, she says. They told her she had too much debt and too little income to be a good credit risk.

"Having them constantly tell you 'no' is very, very demoralizing," she says. "It was a low point."

She borrowed the money from two friends instead and launched the new product, called "Shhh," this spring. Sturm's experience is one example of how businesses are adapting to credit markets that continue to be tight.

"This is what we do," she says. "For a lot of small-business owners, failure is not an option. You figure out how to make it work."

Steps that many businesses are taking include:

Paying bills slowly. Businesses large and small are increasing the time they take to pay bills compared with a year ago, according to an October 2011 report from Experian. Businesses increased the length of their late payments by an average of 16%, to 7.1 days, between September 2010 and September 2011. Large businesses -- those with 1,000 or more workers -- had the biggest increase (28%).

Taking more time to pay vendors and other creditors could indicate businesses are experiencing money problems, but it could also stem from cash-management strategies that favor holding onto cash as long as possible, says Adam Fingersh, senior vice president of Experian's Business Information Services.

Molly Brogan, spokeswoman for the National Small Business Association, says economic uncertainty is causing many businesses to stretch paying their expenses.

"They've been trying to save their money and make sure they can ride of the storm for three years now," she says. "There's not always going to be an endless supply of cash they can sit on."

Finding alternate sources of money. Traditionally, bank loans have played an important part in the growth of businesses. Typically, a business starts using an owner's savings and credit cards. As a business grows, it typically will seek a line of credit from a bank, then apply for loans to buy equipment or add workers.

But since the recession, banks have begun scrutinizing applications much more closely. For instance, in the fourth quarter of 2008, 84% of loan officers said their banks had tightened standards for business loans, according to the Federal Reserve. But beginning last year, more loan officers reported that standards were easing, though credit is still harder to come by than it was before the recession.

As a result, more small businesses started turning to friends and family for money. A July 2011 survey by the National Small Business Association showed that 21% of small-business owners surveyed said they took private loans to meet capital needs, up from 12% in August 2008. Use of bank loans (49%) and credit cards (37%) were down slightly. The report found that: "While there are fewer businesses using financing, those that do are using more options for financing."

Reducing debt. Just as U.S. households have been paying down their debt since its peak in 2008, many businesses are chipping away at what they owe.

"There's more of an emphasis on eliminating old debt as opposed to borrowing more to grow," says Mike Periu, a small-business financial adviser in Miami.

An August 2011 survey by MultiFunding, a company that helps businesses apply for loans, found that 73% of business owners who said they needed a loan did not apply for one in the last year. The top two reasons for not applying were fear of being rejected and wanting to improve their business credit first.

Paying off credit card

Dun & Bradstreet, which tracks businesses' creditworthiness, says companies have become better credit risks as they shed debt. The amount of charges more than 60 days past due on business credit-card accounts has nearly returned to pre-recession levels of around 4%, after spiking to more than 6% in 2009, according to the company's Small Business Risk Insight Database.

Sturm, the beauty-products e-retailer, says she's been working to pay down $12,000 in credit card bills. It makes her more comfortable to have less credit-card debt, she says, because it frees up more money and makes her business more likely to qualify for a loan in the future.

Periu says businesses' reaction to tougher credit requirements often makes sense for those businesses. But when taken together, the strategies of paying off debt, slowing payment of bills, hoarding cash and holding off an expansion help explain why this recovery has been so anemic.

"In the long term, that's a healthy thing, but in the short- and medium-term, it's definitely an indicator of more pain ahead," he says. "It's just another indicator that the sources of jobs, which are businesses, are not in a position to grow aggressively."