Predictions by small business owners

by Raymond D. Minkus

Predictions by small business owners and managers indicate they will be seeking more credit in 2008, however these requests are expected to be met with increasing contingencies.

A recent study by the Small Business Research Board (SBRB) conducted for Business Today Magazine reveals both the realities of the relationships between owners and managers with their lenders as well as the expectations for the current year. The nationwide SBRB / Business Today Small Business Lending Relationship and Loan Requirements Study provides insight on the views of businesses throughout the U.S. and also delineates the findings into seven distinct industries—manufacturing, construction and contracting, retail, food and beverage, distribution and wholesaling, transportation and automotive.

The SBRB / Business Today report examines the current state of small business lending relationships and loan needs. In addition, the report details loan activity, collateral requirements and cost and compliance pressures.

Among the questions asked were:

• With how many banks, lenders or leasing companies does your firm have a relationship?
• Is your principal lending relationship with a local bank, regional bank, national bank, foreign bank, non-bank lender, leasing company or other?
• How many years have you been a customer or client of this organization?
• Would you categorize your relationship as excellent, good, fair, poor or "only being used as a last resort?"
• How many years were you with your prior principal lender?
• Do you have a line of credit and, if so, how has it changed in the past 12 months?
• During the next 12 months, will you request a change in your line of credit?
• If you have increased your loan level during the past six months, did you find access to credit easier, unchanged, more difficult or impossible?
• What loan aspects are most affecting your business?
• When you have used your residence as collateral are you finding that lenders are also changing the amount you are able to borrow against that property?

The findings offer a glimpse as to how you and your business may compare to your peers.

• More small businesses will seek additional credit in 2008;
• Majority of small business owners use their residence as collateral;
• Higher rates and more pressure for personal guarantees are the most significant loan related issues;
• Most owners and managers are finding access to credit unchanged or easier; and
• While majority of small businesses view relationships with lenders as "good" or "better," loyalty is a significant issue.

The specifics:
Among those with credit facilities, 23.3% said they increased their loans or line of credit in 2007. Within this overall group of participants, 14% said they had decreased their credit needs during the previous 12 months while nearly 40% reported their loan amounts were unchanged.

During 2007, the majority of participants (53.1%) in the United States poll said they felt that access to credit was unchanged from the previous 12 months while 27.1% said it was "easier." Of the remaining respondents, 14.3% described access to credit as "more difficult" and 5.5% indicated that access to credit was "impossible."

More small businesses will seek to increase their loan levels or lines of credit during 2008 according to the SBRB study. While 26.8% will be applying for more credit during the next 12 months, 9.4% intend to reduce their credit needs. The remaining 63.7% will attempt to hold their credit needs at the current level.

The majority of small business owners in the U.S. that use their residence for collateral are getting mixed responses from lenders when requesting higher credit limits according to the poll.

The SBRB study indicated that 54.2% of those responding to the poll use their residence as collateral. Of those business owners indicating that they use their home as collateral, 42.4% said their lenders had amended their borrowing levels while 57.6% said the lenders have not changed the credit level.

Where loan levels were adjusted, two thirds (66.7%) received higher credit ceilings. The credit level for 27% was raised by up to 10% and in 39.7% of the cases the credit limit was increased by more than 10%.

Conversely, in 15.8% of the instances the credit limit was reduced by at least 10% while in 17.5% of the instances the credit limit was reduced by more than 10%.

Higher loan rates and increasing pressure to provide personal guarantees are the two greatest factors impacting the relationship of small businesses with lenders. The report showed that 24% of the respondents contend higher rates are having the most significant impact on their businesses. More pressure and demands for guarantees was identified by 16.1% of the respondents as the second most significant factor.

The study also indicated that greater expenses to obtain a loan (listed by 15.3%), stricter covenants (14.4%) and increased covenants (14%) were also among the top five lender related issues. They were followed by greater expenses required to comply with loan requirements (9.3%) and the need to upgrade to an audit (6.7%). The poll clearly indicated that small businesses in the United States were satisfied with their key lenders as 88.4% categorized the fit as "good" or "excellent." Of the remaining group, 10.1% said the relationship as "fair" while 1% felt it was "poor." Fewer than 1% said the relationship was their "last resort."

The SBRB / Business Today study also indicated that relationships are lasting longer with more than 78.6% reporting they have been with their current principal lender at least five years. Comparatively, slightly more than 21% have been with their current primary lender four our fewer years. According to the report, 2.3% of the small businesses are in their first year with their current lead lender while 5.7% said their relationship is in the second year.

Of these same respondents, two-thirds said they were with their previous key resource for five years or longer before making a change while one-third said their prior relationship lasted four or fewer years.

Nearly 40% of the owners or managers said their business has a relationship with one lender and slightly more than 25% have a relationship with two lenders. The remaining 35% have concurrent relationships with three to five lenders. Questions about the quality of the relationships only pertained to the principal lenders.

Additionally, 48% of the respondents said their principal lending relationship is with a local bank and 17.4% said the relationship is with a regional bank. Another 26.2% reported a national bank is their chief lender. Foreign banks, non-banks, lending companies and those sources classified as "other" were cited by 8.4% as their lead lenders.