Paying the piper
Easy credit led to economic hangover
By JOHN GOLDEN
At the Westchester Small Business
Development Center, Director Thomas Morley has seen
the effects of a tighter credit market on the startup
entrepreneurs and business owners his office serves
in Westchester, Rockland and Putnam counties.
“In the lenders’ defense, they are lending money and
money is available,” he said. “I would classify some
of it as a correction” after years of easily obtained
credit. Banks and other lenders “are requiring that
the packages be a little more diligently prepared”
and scrutinizing applicants’ business plans more closely.
“Some of it is a correction, but there is a credit
tightening that has happened in the last year, absolutely,”
said Morley, whose office on the Rockland Community
College campus in Suffern also maintains outreach offices
in Dobbs Ferry and Harrison.
“The first ones to go were the more marginal packages,”
he said. “Last year, a credit score of 700 or 650 was
generally not too bad. If 650 could get you a $50,000
loan for your business, this year it’s like 675” to
qualify for that same loan, he said.
Home equity loans, a traditional means of financing
for small businesses in the last 10 to 15 years, “have
gotten more difficult to get and the banks have gotten
more critical on them,” he said. “Nowadays everybody
gets more nervous more quickly” if a borrower is late
on payments.
“We’re finding it more difficult to get more packages
that are less collateralized than in the past,” with
personal credit scores and personal guarantees no longer
enough to obtain financing. Lenders more often require
real estate collateral, a deterrent to some start-up
entrepreneurs who, looking for a $25,000 or $50,000
unsecured loan, decide they’re not willing “to bet
the house” on their business venture, Morley said.
“More lenders in general are looking for shorter-term
packages,” Morley said. A seven-year loan for equipment
financing now might be five years, “which makes it
more difficult just based on the value of the payment”
a borrower must make.
“Where credit has been tightest is on folks who are
doing startups” and typically seeking to borrow $15,000
to $25,000, he said.
Morley pointed to “the dark side” of small business
in a slowed economy: “As credit tightens, small-business
owners will use credit cards for easy access to capital.”
That added debt can lower credit scores and send a
small business into a downward spiral.
Credit-card debt “is very expensive borrowing when
you do it for a small business and it’s easy money
for small businesses to get in trouble with. So that’s
created some issues for us with some clients,” he said.
“Small-business owners need to look closely at the
fiscal management of their business” and determine
how to cut costs, he said. “Fiscal management is what
companies in times like this really need to focus on.
Whether we’re in the ‘r-word’ or not, folks need to
look very critically at how they’re marketing and selling
their products and how do I boost sales in a slowing
economy, which is not always by raising prices.”
In Westchester and Rockland counties, limited alternative
financing is available to qualifying existing small
businesses and start-up borrowers who have been declined
by a lending institution. Loans range from $2,500 to
$30,000 at terms of one to five years. Use of the funds
must result in the retention or creation of jobs in
either of the two counties.
Officials at the Westchester County Industrial Development
Agency (IDA) and county Office of Economic Development,
which administer the fund in cooperation with the Rockland
Economic Development Corp., said about $100,000 is
currently available in the loan program, which was
funded originally by a $750,000 grant from Empire State
Development Corp. The county IDA in 2007 took over
administration of the program from the Westchester
County Association.
County IDA Executive Director Theresa G. Waivada said
three loans have been approved this year for small
businesses in the county. Since promoting what had
been an underutilized resource in the small-business
community, “We have been very successful,” she said.
“We’re going to be talking to the state about reenergizing
it” with additional funding.
As credit has tightened, said Morley at the region’s
Small Business Development Center, “We’re also seeing
that entrepreneurs still are passionate about starting
small businesses,” especially among the baby boom generation
entering early and active retirement. Delicatessens,
restaurants and small service companies are especially
popular, he said.
“In the past year, we’ve had like eight deli clients,”
Morley said. “In each case, they were acquisitions
of existing delis” whose owners were retiring. The
new owners “are looking at 10 to 15 years before they
retire,” he said.
“I think people are seeing opportunity in traditional
businesses. People always have to eat.”
Morley said his office also has seen “an uptick in
interest in franchises” by entrepreneurs, including
small cleaning services and convenience stores. “You’re
working for something that’s basically tried and true,”
he said, what Morley calls a “formula business.” And
startup costs for a franchise typically require less
of an investment, he said.
Some of those popular startups, however, such as restaurants
and lawn-care companies, “will get hit hardest” as
the economy further slows in the next year, Morley
said. “In counties like Rockland and Westchester, those
discretionary-spending businesses are going to be the
first to suffer,” he said.
When borrowing, “They’ve got to be smarter about what
they need and smarter about how they’re going to use
it.”
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