Small Businesses Are Finding Bank Loans Easier to Come By

Jake Fitzsimmons opened his first Stuft Burger Bar in Fort Collins, Colo., in 2010, after the worst recession in decades. It turned out to be an excellent time to open a burger joint — Coloradans were downsizing their dinners out — but a terrible time to apply for a loan.

“Why even bother?” Mr. Fitzsimmons remembers thinking.

Instead, he used his own savings and borrowed money from his father. In 2012, Mr. Fitzsimmons and his partner, Tiffany Helton, did it again, opening a second restaurant without bank help. Last fall, however, they tried a different approach.

Mr. Fitzsimmons and Ms. Helton were preparing to open a third location in Greeley, about 30 miles from Fort Collins. Given Stuft’s success and the improving economy, their adviser, Richard Pickett, executive director of the East Colorado Small Business Development Center, offered an alternative to going to each bank “hat in hand,” as Mr. Fitzsimmons put it, to request a loan.

“Why don’t you have them bid on it?” Mr. Pickett suggested.

So the pair hosted three banks — Bank of Colorado, First National Bank and Wells Fargo — at Mr. Pickett’s office one day in early September. In back-to-back, hourlong meetings, they made their case for a $500,000 loan. A week later, Mr. Fitzsimmons also met with a loan officer from the bank that held his business accounts, Home State Bank. Because the banks knew that the pair were talking to other banks, Mr. Fitzsimmons said, “Our hope with that was that they would give us their best offer originally.”

Within a couple of weeks, three of the lenders had returned preliminary proposals. Bank of Colorado and First National offered nearly identical terms for a loan that split the risk with the Small Business Administration, including a 5.25 percent interest rate that was lower than the rate offered by Home State. (Only Wells Fargo made no offer.) Ultimately, Mr. Fitzsimmons and Ms. Helton turned to Bank of Colorado, a community bank based in Fort Collins, for a five-year loan with a five-year renewal.

By many accounts, as the economy adds jobs, more small businesses are looking to borrow money, and more banks are eager to lend it — at least to the right borrowers. “It’s actually a really great time to access small-business capital,” said Keri Gohman, executive vice president and head of small-business banking for Capital One. “Rates are low and banks are also feeling the economic recovery. We really want to lend. Small-business owners can shop around and work with banks to find the best rates.”

But industry observers caution that both demand for, and access to, capital remain well below where they might be in a strong economy. For example, large banks approved 20 percent of small-business loan requests in June, up from 9 percent three years ago, according to data from Biz2Credit, an online small-business loan broker. But before the recession, the rate was around 36 percent, said Rohit Arora, Biz2Credit’s chief executive.

Perhaps surprisingly, banks seem more eager to lend than small businesses are to borrow. “Demand is up 20 to 25 percent from the trough of the downturn, but that’s still very subdued compared to before the downturn,” said Paul Ballew, chief data and analytics officer for Dun & Bradstreet. “From the peak to the trough, there was about a 50 percent decline in that time. We’re a little beyond halfway back, but we still have a long way to go.”

One reason loan demand might be tempered is that many small businesses assume they will not qualify for a loan, said Jeff Stibel, chief executive of Dun & Bradstreet Credibility, an independent company that helps businesses manage their Dun & Bradstreet credit reports. According to Mr. Stibel, that is “because they are oftentimes going to the wrong bank.”

“The reality is that there are many lending institutions for any successful small business,” he said.

And, observers say, more small businesses have regained their financial footing after years of hardship. “On the back end of this cycle, businesses are as healthy as we’ve ever seen them,” said Mr. Ballew. “Balance sheets are in great shape, cash flows are in great shape, and their ability to pay their bills is in great shape.”

In addition, the business owners’ personal cash flows have improved, said Mr. Arora, and the value of their homes, which are often used for collateral, has stabilized if not risen.

“The banks look at the overall global cash flow, which includes the business and personal side,” Mr. Arora said. “And both sides are improving, so as a result banks are seeing an overall improvement in credit quality.”

Some banks say they have not loosened their credit standards with the recovery. “We’re using the same underwriting guidelines we were then, which is one of the reasons the bank is so strong and has such a strong capital base,” said Lori Annand, Mr. Fitzsimmons’s banker at Bank of Colorado.

But recent surveys of bank lending officers by the Federal Reserve have shown that some banks have been easing credit terms for smaller businesses since at least mid-2012. Some banks, Mr. Stibel said, are “not putting such a heavy reliance on a borrower’s performance over the last three years,” which most likely suffered during the slow recovery.

And some banks are more willing to lend on lower credit scores, said James Chessen, chief economist at the American Bankers Association, a trade group. “The economy is getting better, and as the economy gets better, the risks that banks won’t get repaid goes down,” he said.

One businesswoman who got a second look from a bank is Charlene Nagy, who owns Confluent Translations, a translation service in Pittsburgh that has four employees. Two years ago, Ms. Nagy began looking for a $30,000 line of credit, or “that little extra cushion,” as she put it. But with her “consistently profitable” business burdened by debt incurred by a former partner, the most she was offered was a credit card with a $13,000 limit or a term loan. Then an adviser suggested this year that she get in touch with First Niagara Bank, based in Buffalo.

“It was the simplest phone call I’ve ever had,” she said. Unlike past encounters with loan officers, she said, “there were no mounds of paperwork.” Ms. Nagy received the line of credit even though her company’s financial situation has changed little.

Still, even growing companies can be turned away. In November 2011, James Marzilli started Marzilli Machine Company in Fall River, Mass., with a bank loan that he said required collateral worth twice as much as the loan itself. Today, he said, the company is “slightly profitable” on revenue that will approach $750,000 this year, about twice what it was last year.

But when he went back to his bank for a line of credit, “the bank said, ‘We’d love to give you the money, but we don’t know if we can, because you just don’t have enough collateral,’” Mr. Marzilli said. “They want to take almost no risk whatsoever.” And, he added, “I’ve had a checking account with these people for 15 years.”

Instead, Mr. Marzilli expects to get his line of credit from a local economic development agency, Jobs for Fall River Inc.

Back in Colorado, perhaps the best part of the agreement Mr. Fitzsimmons managed to negotiate was that the bank agreed to give up its rights to his house once construction on the restaurant was complete.

“Everybody was asking me to pledge my home as security,” he said. “And I held the line on that, and eventually they let go of it.”