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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   December 2013

Powering Ahead or Grinding to a Halt?

Working capital remains critical to keep small businesses running

Powering Ahead or Grinding to a Halt?

Since the financial crisis hit and credit availability tightened, small businesses have been hit hard by difficulties in gaining access to necessary working capital. Despite frequent political rhetoric about their importance as the proverbial engine that powers the U.S. economy, not much has been done so far to keep the gears of small businesses in motion or to ensure that capital continues to flow into these enterprises.

Commercial mortgage brokers who work with small businesses are familiar with the issues that surround this market, as they struggle to fund deals through traditional capital sources — from conventional banks to government-guaranteed lending programs. Each of these sources has played a different role with varying degrees of involvement in catering to the funding needs of small businesses. Lending has been tight across the board, however, no matter what the source.

Will the situation change for small businesses in 2014? Take a look at the factors shaping the lending environment for the nation’s small players and what to expect in the future.

Commercial mortgage brokers who specialize in working with small businesses may be familiar with how the shortage of access to working capital has taken a toll on many businesses across the nation. With 2013 coming to a close, it is important to look at the lending opportunities — and hurdles — that brokers and small-business borrowers must meet to get their deals funded.

Guaranteed loans

In funding small-business deals, the U.S. Small Business Administration (SBA) has been a leader with its 504 and 7(a) program. In fact, in fiscal-year 2013, the SBA supported more than $29 billion in lending to small businesses. With the 504 program alone, the SBA approved more than 7,700 loans supporting more than $11.7 billion in small-business commercial real estate projects.

But note that the SBA does not lend money directly. Loans are extended by banks and guaranteed by the SBA. In a way, the SBA protects lenders from loss by guaranteeing to pay the bank as much as 85 percent of the value of the loan should the borrower default. This SBA guarantee provides lenders with comfort and confidence in lending to individuals (small-business owners) whose credit is marginal. In case of default, the borrowers are obliged to pay back the SBA.

The good news is that loans guaranteed by the SBA can receive a waiver of the fees typically charged by the SBA to the lender for processing. This waiver makes it more attractive for banks to work with SBA loan programs. The bad news, however, is that the SBA often is considered more stringent regarding borrowers’ personal credit scores and equity position.

Because the recession has damaged many individuals’ personal credit, it is more difficult for some potential borrowers to qualify for these loans. In addition, with a still-ongoing struggle, their credit situation is unlikely to change any time soon, which means it has become more difficult for individuals striving to start a business to meet their regular financial obligations. As a result, they may be taking on more debt through credit-card activity and being forced to delay payments on existing credit obligations. Both activities are a recipe for hurting credit scores even further. This vicious cycle likely will continue until there is a breakthrough in capital availability.

Commercial banks

Since the credit crisis, banks of all sizes have been subject to close regulatory scrutiny for their credit standards and underwriting functions. This scrutiny has led banks to be much more cautious about lending to small- business owners.

Many large banks, including Bank of America, JPMorgan Chase and Wells Fargo & Co. have been fined heavily, and many of these fines were related to  subprime-lending issues and/or issues pertaining to the securities that were sold by the investment arms of these banks. Nevertheless, the fact that such fines have occurred affects large and small banks alike in several ways, including:

  • Having less net cash reserves at these banks
  • Uneasiness about what else may happen

In addition, banks now are required to keep a higher percentage of reserves against loans, which can result in less cash reserves and fewer loans. Although these pressures are expected to lessen eventually, small and medium-sized businesses will continue to have a difficult time securing funding from commercial banks in the near future.

Soliciting investors

In April 2012, the Jumpstart Our Business Startups (JOBS) Act was passed in support of entrepreneurship and small businesses. The JOBS act made it easier for startup companies to solicit directly for capital investment from individuals by removing a former ban on general solicitation. Instead of looking to work with venture-capital companies, startup companies now can present offers directly to individual small investors.

By law, the Securities and Exchange Commission (SEC) is responsible for writing rules and issuing studies regarding capital formation, disclosure and registration requirements. Many of these rules, however, can be restrictive to startup companies that are trying to raise capital from private investors. For example, the SEC requires that investments are made by accredited investors. An individual accredited investor is someone whose annual income is at least $200,000 in each of the two most recent years, and whose net worth is at least $1 million. This rule obviously discourages many small investors who may not meet these requirements.

In addition, the soliciting company must provide the SEC with a disclosure that details its offer 15 days before it begins solicitation (that is to make a presentation to anyone about becoming an investor). If  the SEC does not receive this disclosure on time, the company could be banned from raising funds for one year. If the presentation changes over time, the company should resubmit the details to the SEC with the same timing restrictions.

These restrictions have made many startup companies leery of looking for funds. It simply blocks another venue that startups had considered open for capital.

Government spending

Commercial mortgage brokers may be well aware of how economic uncertainty can take a toll on credit availability. The fights in Congress over the debt ceiling, sequestration and government spending haven’t helped small businesses. Unfortunately, similar events may flare up in the coming year.

Regardless of the individual positions on these issues, the fact remains that frequent squabbling in Congress creates a high level of uncertainty in financial markets. Banks and potential investors become more conservative, which makes qualification criteria considerably more stringent. In addition, because the economic recovery is still fragile, continued uncertainty could push the economy into another round of recession, which certainly does not bode well for small businesses looking for capital.


Although events and market forces have created a difficult environment for small businesses looking for working capital, commercial mortgage brokers should consider other avenues that have been catering to the needs of small businesses and startups. These include:

  1. Smaller community banks
  2. Local not-for-profit lending organizations
  3. Factoring companies that purchase invoices and finance purchase orders to suppliers

These sources can provide your clients with working capital, funding for their deals and bridge loans when needed. With that, they can weather the near future until funding from traditional sources returns at full force.

• • •

It is likely that the constricted lending environment eventually will loosen its grip, and capital will become more readily accessible through traditional means. Until then, commercial mortgage brokers and small-business owners must work together to make sure that the engine that is driving the U.S. economy continues to be fueled with capital. Brokers and their small-business-owner clients must work with the funding sources available to them — from the SBA to alternative lenders — to keep these businesses running.


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