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Risk-Averse Banks Look Long and Hard at Small Business Lending

Despite his company’s tripling in sales, doubling in cash flow and profits, and reducing debt, Sayed Ali can’t get a business loan.

The veteran executive who ran a publicly traded firm and acquired Interpreters Unlimited, a Sorrento Valley language interpretation service, five years ago said he’s been to five different lenders, big and small, and all have turned him down.

“I have double the cash flow to service a loan, and yet I can’t qualify for one,” Ali said. “The banks are being ultraconservative right now.”

Interpreters Unlimited stands to generate about $6.5 million this year, up from $5.1 million last year. The business also added 14 employees in the past two years to bring its total staff to 24. But those numbers apparently don’t sway many lenders, which continue to put a focus on the hard assets as the main collateral for a loan.

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Betting on Defense

At the other end of the lending spectrum is Eric Basu, president of Sentek Global, a local defense contractor. The business that supplies engineering and information security services to the federal government recently lined up a $4.5 million financing package through Bank of America.

The package consists of a $3 million line of credit, as well as a couple of other loans backed by real estate, plus an equipment line of credit, said Basu. At least two other lenders were vying for the business.

According to a study by the Federal Reserve Bank of Kansas City, loans by big banks to small businesses fell by 14 percent from March 2010 to this March, while loans from community banks declined 3 percent.

Matt Garrett, whose TGG Accounting provides outsourced accounting and finance services to small companies ranging from $2 million to $20 million, said the lending environment has improved somewhat this year.

“We’ve seen a slight opening up of the banks’ purse strings that began late last year,” Garrett said. “In 2008 and 2009, the banks were trying to get loans off their books, and it was very hard to do any deals.”

Garrett said for all of last year, his firm worked on seven financing deals for a total of about $9 million. Through the end of May, TGG has already worked on 16 financing packages that total $38 million. About half of those arrangements had multiple lenders competing for the business, he said.

“There are more banks looking at the same deals. That’s something we just didn’t see happen in 2010,” he said.

Shopping Around

While some banks appear to be ramping up their small business lending, others are shutting down divisions that cater to the segment, leaving their customers to line up new lending partners.

Last year, Paulson Manufacturing Co. in Temecula, a maker of protective equipment for a variety of industries, was informed by its lender, First Bank, that it was shutting down its asset-based lending division, said President Roy Paulson.

Unlike many other manufacturers that have been decimated by the Great Recession, Paulson said his 63-year-old company has been able to weather the bad times fairly well. The company’s broad customer base, the different markets that it sells in (including some 100 foreign countries), and its longevity all contributed to lining up a new financing package fairly easily.

“We definitely shopped around and looked at four other possible lenders,” said Paulson, who decided to go with Security Business Bank of San Diego. The downtown based bank provided a $2 million line of credit and a $1 million loan that is mainly guaranteed by the U.S. Small Business Administration.

The company took advantage of the lousy economy to purchase six new molding machines at $250,000 each. “We saw the recession as a free move on the chess board,” Paulson said. “We took this time to get some new products on the market and buy new equipment at prices that were unheard of a few years ago.”

He noted many small businesses that previously used their residences to get a bank loan have been unable to do that this time because many houses are underwater, and owners do not have any equity left. “Because that’s gone, it’s a big problem,” Paulson said. There has to be another way for small businesses to access the money they need to stay alive, he added.

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