The State of Small Business Lending: Small Merchants Weigh-In

Todd Warner is feeling the spoils of his success as the owner of Tailwaggers and Tailwashers, a small merchant located in Hollywood, California offering healthy and holistic pet supplies both in-store and online.  He has built a large clientele – including a few celebrities – and has become a fixture in the community.  To fund the rapid expansion of Tailwaggers, Todd has worked tirelessly to secure small business loans from traditional banks, but to no avail.  He was turned down on four different occasions despite his widely successful business.

Unfortunately, Todd is not the only one.  Todd is among hundreds of thousands of small merchants across the country who are feeling the effects of a stricter lending market, and, despite recent news that cash is flowing to small businesses again, have been unable to secure the funds needed to expand or even just to stay afloat.

The Reality: State of Small Business Lending

In a nutshell, the small business lending landscape is bleak.

In a recent roundtable discussion focusing on the state of small business lending held by American Express, Bill Dunkelberg, chief economist of the National Federation of Independent Businesses (NFIB) said that small merchants are suffering through what he deemed a bifurcated economy, in which main street and small merchants are stuck while corporate profits and the stock market reach fresh highs.  According to the May 2013 Small Business Economic Trends Report released by the NFIB, only 31% of the hundreds of thousands of small merchants they interviewed agreed that all of their credit needs are currently met.

It has been well documented that, due to stricter lending regulations, banks have become more hesitant to lend to small, unproven businesses since the credit crisis in 2008.  The common misconception is that banks analyze business plans and make lending decisions based on good ideas, which is unfortunately not the case.  Banks are not venture capitalists, and these regulations have been put in place to ensure that banks are lending only to parties that have the ability to pay back what they are borrowing – and many times that minimum is too high for small merchants.

Adding fuel to the fire, according to Dunkelberg, small merchants have grown hesitant to even apply for a loan, because they are discouraged by the necessary “hoop jumping” just to be turned down because they don’t fit the cookie-cutter mold.

With tighter restrictions and an uncertain economy, 77% of small merchants have a negative outlook and do not think things will be getting better soon, according to Dunkelberg’s small business optimism research.

Impact on Small Merchants

The current sentiment makes it ever more difficult for small merchants to stay competitive and grow, especially when a business is specialized or seasonal.  David Wheeler, owner of Manzanita Outfitters, one of the leading providers of outdoor apparel located in Prescott, Arizona, has felt this firsthand.  With most of his sales occurring in the spring and summer, he has looked at every route possible to find cash infusions during his off-season months so that he can pay vendors and stock his shelves to prepare for the inventory influx. He too has faced many challenges trying to secure a bank loan, and believes that banks are not interested in lending to small merchants, only bigger businesses and franchises. 
Both Warner and Wheeler believe that the system’s biggest flaw is that there is no relationship between the bank and the business. Not only are banks required to work off of a checklist, but the decision makers or third party evaluators are not local, do not know the community and, more importantly, do not know the merchant.

Alternative Options

According to Wheeler, small merchants should have a backup plan in the likely event funding isn’t granted from a bank.  Because small merchants generally do not have the collateral required by most big banks, one should consider exploring alternative lending options.

This could mean turning to friends and family as investors, or to community banks that operate within a given region and have strong local market knowledge.  Dave Wheeler and Todd Warner found a solution in American Express’ Merchant Financing, which leverages their existing relationship with American Express, and provides them with a loan that is based on their anticipated American Express receivables.  This particular option works in their favor because American Express knows their business and their customers since it plays a large role on both sides of the buying process.

At the end of the day, it is small merchants’ uniqueness that sets them apart from their big-box chain competitors. However, that same uniqueness hurts their chances of securing loans from traditional banks that require their customers to “fit the mold.”  Given the reality of the lending landscape, today’s small merchants need to broaden their networks, so when they need financing, they can find a friendly face in supporters and partners who know them and understand their business and its specific needs.

By Edmond Jay, Senior Vice President, US Small Merchants Group, American Express

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