Market conditions limit access to capital

Southwest Missouri is discovering that while it is insulated from the worst of the economic downturn, it is not immune.

Residential construction has slowed to a crawl and commercial contractors are warily eyeing their shrinking project backlogs. The toxic investments of failed and faltering Wall Street firms continue to limit the availability of credit on Main Street, and while the well-capitalized have hunkered down to weather the storm, the heavily leveraged find themselves with a shrinking number of options.

Access to finance

For today's business borrowers, the name of the game is equity, and those who cannot bring a significant stake to the table may find the game is over.

Banks are looking for "high quality business borrowers whose businesses are profitable and properly capitalized, whose management team and ownership have experience and have shown a track record of being able to operate a business profitably," said Joe Turner, president and CEO of Great Southern Bank.

Low interest rates are driving significant mortgage refinancing, but loan demand in Great Southern's traditional areas of strength - commercial construction and real estate - remains soft, Turner said.

Small-business loan demand also is down as would-be entrepreneurs wait on the sidelines for a resurgence of consumer confidence.

In December, Great Southern received a $58 million capital infusion by selling preferred stock and warranties under the Troubled Asset Relief Program's Capital Purchase Program. Turner noted that while TARP positions the bank to meet loan demand, he said it doesn't create loan demand.

"The economy and opportunity in the economy are what create loan demand," he said.

Meanwhile, the expansion of the Term Asset-backed Securities Loan Facility to include commercial mortgage-backed securities is expected to kick-start the secondary lending market by making Federal Reserve dollars available to investors to purchase consumer-related securities. The Fed has committed to lend up to $1 trillion through TALF, a move that is expected to encourage commercial real estate investment and small-business lending.

Small-business challenge

Springfield's diversified economy has long relied on the small-business sector for growth and innovation. But while the economic climate itself is discouraging many entrepreneurs from launching new firms, it also has sapped the traditional sources of startup equity: personal savings, 401(k)s and home equity.

Still, the U.S. Small Business Administration, which just received $730 million in funding through the American Recovery and Reinvestment Act, is offering a few rays of hope.

The $730 million in new federal funding includes:

• $375 million for temporary fee reductions or eliminations on SBA loans and increased guaranties up to 90 percent;

• $255 million for a new loan program to help small businesses meet existing debt payments;

• $30 million to expand SBA's Microloan program, enough to finance up to $50 million in new lending and $24 million in technical assistance grants to microlenders;

• $20 million for technology to streamline SBA's lending and oversight processes;

• $15 million to expand SBA's Surety Bond Guarantee program ;

• $25 million to staff new programs; and

• $10 million for the Office of Inspector General.

The act also authorizes refinancing for certain SBA loans so borrowers can expand on favorable terms, and it expands leverage capability for Small Business Investment Companies program.

"There's just been no place for startups to find financing for the last six months or so because the bank couldn't sell the loan in the secondary market and because of the general credit crunch in the country," said Walter Cowart, manager of SBA's Springfield Branch Office, which in fiscal 2008 backed 383 loans worth $85.6 million, about $20 million less than in 2007.

With the new funding and support through TALF, it is hoped that small-business lending will grow.

Cowart noted, however, that successful borrowers will be those that have a solid business plan, including income projections, and, most importantly, equity.

SBA has never provided 100 percent financing, "and the residential mortgage industry is a prime example of what happens when you have 100 percent financing," Cowart said. "To the extent we can control it, we're not going to allow unsound credit on the books, because as the current economy shows, that is counterproductive in the long run."[[In-content Ad]]