Filling the Bank Credit Gap

Are you considering applying for a small business loan? If you are like most convenience store operators and other small business owners, you have been hunkered down for the last several years waiting for the economic outlook to improve, credit markets to thaw and consumers to start spending again. The good news is that the economy does seem to be strengthening and small business loans are getting a little easier to come by.

According to the Wall Street Journal, a recent Federal Reserve Bank survey of senior bank-lending officers found that 28 percent of banks had lowered the cost of credit lines early this year to businesses with annual sales of less than $50 million. Other reports show small-business loan approval rates among community banks rising above 50 percent for the first time in years.

While the trend is encouraging, these numbers are also sobering. Nearly half of small loan applications to smaller banks are being rejected. At big banks, the figure is 83 percent. That is a huge slice of the small business sector being left behind.

Hope springs eternal for a return to the good old days when banks actually competed to loan money to small businesses. But the truth is that this is not likely to happen. Industry consolidation, new regulatory burdens and stricter enforcement of lending standards have dramatically reduced small business lending across the banking industry.

A recent analysis by Scott Shane, an entrepreneurial studies professor at Case Western Reserve University, found that only 29 percent of all U.S. bank business loans were less than $1 million in 2012. That percentage represented a steady decline from 52 percent in 1995. The analysis did not go into more detail, but it seems reasonable to assume that a much lower percentage of loans were less than, say, $50,000.

The Small Business Administration (SBA) has struggled to entice banks to make more small loans. The New York Times reported that SBA-guaranteed general business loans, or 7(a) loans, for $150,000 or less fell from $3.5 billion in 2007 to $1.4 billion in 2009. While the agency's loan programs have since fully recovered, the total lent in these small loans has remained flat and constituted just 9 percent of the 7(a) program in 2012.

So, what are the alternatives for convenience store owners who need working capital, but cannot qualify for a traditional or SBA-backed bank loan? Until recently, there really weren't any options besides family and friends or your personal credit card. But that has changed. Over the last decade or so, some entrepreneurs and their investors saw a business opportunity. They developed more focused underwriting models -- based primarily on the applicant's cash flow and overall business health -- and carved out a specialty finance niche that enables them to make decisions much faster than banks and with a lot less paperwork.

These companies may offer a short-term loan that is structured like a traditional loan with fixed payments, or a merchant cash advance that is repaid through a fixed percentage of the merchant's daily card receipts. In either case, the fees or factor rates will be much higher than one would expect with a traditional bank loan, to compensate for the risk.

Some of these online-only finance companies rely on systems that automate the process entirely, with little or no human intervention, and limit themselves to small loans in order to spread the risk. Others still get to know every applicant personally. This enables them to make loans as large as $2 million in as few as five business days.

What kind of convenience store owners are getting financing from specialty lenders? The answer is all kinds.

Consider Sussex Mini Mart, located in Waverly, Va., a rural area about 45 miles southeast of Richmond. Terri Tawfiq and her husband bought the store 10 years ago. Terri works there full time. When the economy tanked in 2009-2010, they needed some extra cash to tide them through the winter months. Later, when the economy picked up, they wanted to build an addition, but did not have the cash to pay for it. More recently, their air conditioner conked out unexpectedly during the summer and had to be replaced quickly.

If the Tawfiqs had to depend on a bank for a short-term loan, they might not be in business today.

These specialty funding sources aren't for everyone, though. You need to weigh the cost of the money against the return it can generate, or the lost opportunity of not borrowing. A store owner with an opportunity to double the size of his or her business may be a good candidate, while a small business struggling to make payroll is not.

Whether you operate a single store or a chain of locations, consider all your options and what best works for your business. If you can get a bank loan that meets your needs, that is likely your best option. But as the banking landscape changes, expect alternative lenders to play an ever-growing role in the U.S. small business sector.

Marc Glazer is president and CEO of Business Financial Services Inc., a provider of specialty loan products for businesses in all 50 states, as well as Canada and the United Kingdom. Business Financial Services is based in Coral Springs, Fla. More information can be found at www.businessfinancialservices.com.

Editor's note: The opinions expressed in this column are the author's and do not necessarily reflect the views of Convenience Store News for the Single Store Owner.