When Decorize Inc. CEO Steve Crowder recently consulted five area banks about establishing a new line of credit for a subsidiary of the home furnishings wholesaler, he received five disconcerting responses.
And those responses, he said, point to one major concern: Regional banks are gladly building their deposits, but few seem willing to lend money at an affordable rate to area businesses hoping to power through the recession.
Crowder said the banks, which he declined to identify, either turned away Springfield-based Decorize (OTC: DCZI) or came back with unpalatably high interest rates characteristic of an industry-wide paradigm shift toward hard-line lending practices.
"They've become much more conservative without realizing the implications to the small companies," said Crowder, who oversees the international company's three divisions: Decorize.com, GuildMaster and Faith Walk Designs. "If our interest rate goes from 4 percent to 8 percent, I have to go figure out how to increase my prices or reduce my costs to cover that spread."
Crowder added, "We're trying to fuel the economy. Companies like us and other small businesses are looking for capital to grow their business. Getting cheaper money is a way for us to grow. ... If the banks start increasing their interest on credit lines, then ... that inhibits our growth."
Unfortunately for Decorize and other smaller companies eyeing growth, local banks are likewise hunting for capital. Several are soliciting investors or taking advantage of federal stock-purchase programs to shore up their reserves against potential loan losses.
For the foreseeable future, small businesses unable to stomach higher interest rates will likely have to turn to private equity, credit unions or even credit cards to pay the bills, Crowder said.
Mitch Jacobs, CEO of New York-based alternative lender On Deck Capital, told BusinessWeek last month that the difficult funding environment for small-business owners has reached new heights.
"We have always woefully undercapitalized this critical segment, and now it's even worse," he was quoted as saying.
Crowder said an undercapitalized small-business sector certainly is the case in Springfield.
One of the banks he petitioned wouldn't even provide a quote after referencing the company's most recent quarterly earnings report filed with the Securities and Exchange Commission in November. Decorize, which operates a headquarters at 1938 E. Phelps St., actually posted its first-ever first-quarter profit, albeit small at roughly $8,600, according to the SEC report. Its fiscal 2008 fourth-quarter profit of about $185,000 was the largest for the nine-year-old company.
"We've had a turnaround over the last six months, but we only have one quarter of filings," Crowder said. "They never asked us, 'Has anything changed in the business? Have you got a huge infusion of cash? Have you got a big new order?' Here was a bank that was clearly not in a position that they wanted to loan money to anybody."
While Decorize employees took across-the-board salary cuts ranging from 10 percent to 25 percent in late 2008, Crowder said two sizeable purchase orders for Dillard's and Kirkland's are scheduled for the current quarter. But the banks aren't budging.
That's probably not going to change, said Keran Lemons, senior vice president and loan manager for Arvest Bank.
"There is a liquidity issue within the banking system," he said. "Every bank in town's looking for deposits. ... I would venture to say every bank in town is probably very close to 100 percent loans to deposits. Having said that, you probably are more particular in the loans you are willing to make."
Lemons speculated that the industry practice of basing loan interest rates on the prime rate may very well disappear once the U.S. financial system emerges from the current crisis. Linking the two isn't financially feasible for banks with the current prime rate at 3.25 percent, he added.
"What you're experiencing today is that the prime rate is very close to the cost of funds the banks have to loan," he said. "Not too many institutions I'm aware of can survive on a 100 basis-point spread over cost of funds. ... I think you'd find that, historically, most banks are looking for an interest rate spread of about at least 350 basis points."
Lemons also noted that banks are now favoring cash-flow loans over asset-based loans, and he acknowledged that certain types of businesses likely would have trouble pledging enough cash to cover larger debts.
"Those businesses that have gone back and looked at the manner in which they do business and have become lean will be survivors," he said. "Those that haven't are going to struggle. If repayment of the loan is predicated on the sale of an asset as opposed to cash flow, I would suspect that the availability of lending is going to be more expensive."
Credit unions see opportunity
As banks hold the line, at least one local credit union has expanded its offerings by making more loans to businesses -- although Decorize doesn't fit the profile.
The scope of commercial lending at CU Community Credit Union is limited to real estate, and there's been plenty of interest, said President and CEO Judy Hadsall.
Credit unions have been allowed to make commercial loans since 1999, but the staff member overseeing the loans must have at least two years of experience in the field, according to the National Credit Union Administration, an independent federal regulator.
In terms of commercial loans, NCUA permits a credit union to lend 1.75 percent of its net worth or 12.25 percent of its total assets, whichever is lower, said Hadsall.
Based on those restrictions, she said CU Community Credit Union had about $6 million available for commercial real estate loans in 2008. To date, the credit union has approved about $3 million in commercial real estate loans to a mix of businesses and churches, many of which were already members, she said, adding that loans, which ranged from $100,000 to more than $1 million, were primarily used to refinance or acquire property.
Hadsall declined to divulge the credit union's interest rates, but she said most of the commercial loans have a 20- or 25-year amortization schedule.
With demand for consumer loans expected to continue its decline this year, CU Community Credit Union is exploring the possibility of expanding its commercial lending offerings to include equipment and U.S. Small Business Administration loans, Hadsall said.
"We felt like we just needed to take baby steps," she said.
Crowder at Decorize said banks unwilling to make lower-interest loans to businesses in coming months may end up losing prospective borrowers to credit unions.
While Hadsall said she hasn't seen any evidence of that so far, she's hoping word-of-mouth referrals will prompt more businesses to inquire about loans available through the credit union.
