Small firms avoiding loans, citing slow recovery

@CNNMoney April 16, 2012: 6:04 AM ET
Small business loans taken during the recession have long kept Phoenix shop Framin'Works in debt. Firm owner Alan Abeyta is staying away from taking out any more until business shapes up.

Small business loans taken during the recession have long kept Phoenix shop Framin'Works in debt. Firm owner Alan Abeyta is staying away from taking out any more until business shapes up.

NEW YORK (CNNMoney) -- Small firms are faring better, but they aren't seeing enough fortune ahead to justify taking on debt to grow.

The slow pace of the economic recovery is to blame, because while consumer demand keeps growing, it just hasn't been strong enough for most firms to rationalize investing in themselves.

"The economy here's really depressed. And I'm trying to dig myself out of two years of really bad business," said Alan Abeyta, a frame maker in Phoenix.

During the worst of the economic turmoil, Framin'Works owed $30,000 to his wood, glass and paper matboard suppliers. Abeyta has since paid that down to $10,000, but he has yet to shake off the chilling realization he had in 2009, when he started receiving five-figure invoices. It's kept him away from taking out a bank loan to pay his suppliers, as the next few months look uncertain.

"I'm reshuffling what I've got and working with what I have to get myself back to where I need to be," he said. "I just don't want to run the risk of owing to the bank. They're much more ruthless. Vendors can work with me."

His reluctance is shared by many, according to small business bankers at several major financial institutions. They point to Federal Reserve figures that show the slow and weak rise banks have seen in small business loan demand.

Additionally, those bankers have been fighting off accusations that big banks haven't met a clamoring demand for small business loans. They note that the vast majority of small companies have held back from tapping their existing lines of credit. Firms have spent more resources drawing down the debt instead, they say.

Former bank executive Mitchell Weiss, now an adjunct professor at the University of Hartford's business school, said small firm owners are right to be cautious.

"They see the economy improving, but remember the kind of pain they've endured. It's understandable for them to be reticent about jumping back in," Weiss said.

A survey of 757 small firms released this week showed that confidence dropped in March for the first time in six months. The survey, conducted by the National Federation of Independent Business, also showed that 43% made no attempt to borrow last year. That shows little has changed since the bottom of the recession in 2009, when that figure was 44%.

Holly Wade, an NFIB senior policy analyst who worked on the study, said companies have held back from borrowing because they don't see a reason to do it.

"More business owners are seeing it's not a good time to expand. Conditions aren't looking positive in the next three months," Wade said.

That's especially true for wedding photographer Roma Dee Holmes. For years, Holmes has refused to tap into the tens of thousands she's saved up to buy a home, which would double as a boutique portrait studio. Sure, the southern New Hampshire homes she's been eyeing have fallen sharply in price, but business just hasn't kicked up enough to merit tapping into the savings or taking out a loan.

"I've worked really hard to get that nest egg, and I've worked really hard not to touch it," Holmes said. "Delaying my dream is a disappointment, but I'd rather wait it out and do it right the first time than lose what I've already accomplished."

Marc Bernstein, head of small business at Wells Fargo, noted that business owners have remained "rational and prudent."

"Unless they see demand for their product, why get themselves deeper in debt?" Bernstein asked.

Finance industry experts say the one place seeing strong growth is alternative lending, such as merchant cash advances, which rely on credit card receipts, and online peer-to-peer groups and crowdfunding sites that connect supporters and investors with small firms. They've largely filled a gap by lending to less creditworthy borrowers that banks are shying away from, according to Rohit Arora, CEO of small firm loan marketplace Biz2Credit.

But even peer-to-peer lenders, like San Francisco-based Prosper, note the growth is tempered.

As Prosper's chief investment officer, Joseph Toms, put it: "In 2008, a bell rung that said, 'Hey, maybe there's such a thing as too much debt.' " To top of page

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