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Small businesses skittish on borrowing as economic uncertainty looms

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  • The impact of small businesses

    • In North Carolina, small businesses represented 98 percent of the employers and employed 47.8 percent of the private-sector in 2010.

    • Of 27,520 employers in Mecklenburg County, more than half – 14,359 – employ fewer than five people.

    •  The number of Mecklenburg companies employing fewer than 100 people fell 3 percent from 2007 to 2011.

    Sources: U.S. Census Bureau, U.S. Small Business Administration



Charlotte’s economy relies heavily on the small-business sector’s confidence, which is apparently in limited supply.

When businesses of all sizes feel good about the economy, they borrow, expand and add jobs. But to many small companies, which make up the majority of Charlotte’s work force, this is seen as a time to avoid debt, which likely means they aren’t growing.

Wells Fargo and Bank of America have recently hired thousands of small-business specialists who will look to make new loans to boost their banks’ profits. As they add those workers, though, they face many clients who have little appetite for loans.

Business owners say their reluctance is based not on their own companies, but on uncertainty about the economy’s health. That is consistent with the sentiment expressed in national surveys of small businesses.

In Charlotte, and other parts of the U.S., small businesses are an economic generator. In 2011 in Mecklenburg County, 26,706 employers, or 97 percent of all employers, had fewer than 100 workers.

Mark Vitner, senior economist for Wells Fargo, said small-business owners are, in general, more reluctant to take risks than larger companies are.

“When it comes to borrowing money, small businesses tend to have a higher hurdle rate,” he said. “They need to feel more comfortable about where the economy is heading.”

In the ongoing economic recovery, “they’ve been particularly cautious.”

Small-business lending, he said, “just pales in comparison to what we’ve seen in previous recoveries.”

For example, Small Business Administration loans – one type that banks can offer companies – fell from 514 loans in 2007 in the Charlotte area to 222 last year. According to the SBA, a small business is one that has fewer than 500 employees. “They’re just being extra cautious,” said Mike Ernandes, SBA spokesman in Charlotte. They’re “looking at their bottom line, looking at what they have, trying to preserve cash on hand and trying to do what they have to do without seeking additional debt. That’s happening to more and more small businesses.”

On a national level, corporate and small-business loans have been rising since the recession, but not as robustly as lenders would like.

Businesses resist borrowing

Just this past week, banking industry officials spoke about the challenges of getting businesses to borrow more.

On Wednesday, the American Bankers Association’s chief economist wrote that while business loans have increased for 11 quarters in a row, the pace has slowed. For banks, increasing their revenue “continues to be a struggle as businesses delay borrowing because of concern about rising health care costs, tax increases and the pace of our economic recovery,” James Chessen wrote. “Until the fog of uncertainty dissipates, rapid loan growth is unrealistic.”

Lines of credit are going untouched, too.

Wells Fargo CEO John Stumpf, speaking at a conference in New York on Thursday, said use of the lines is at a 30-year low.

“What usually happens is when companies start to think about borrowing, they use their own money first, and then they start to borrow against their lines,” he said. “And we’re not seeing a lot of that yet. There’s still capacity left in plants and equipment.”

Kendall Alley, Wells Fargo’s Charlotte-area president, said in an interview that many businesses aren’t interested in loans because they have saved cash during the recession. “The application volumes haven’t gone back to the robustness that they had,” he said.

The lack of interest in loans among small businesses isn’t unique to Charlotte. On May 14, the Washington, D.C.-based National Federation of Independent Business released the results of its April survey of 1,873 randomly selected association members. Half said they do not want a loan.

Michael Bratt, senior vice president of operations and finance for licorice maker Lucky Country, which employs about 40 people at its Lincolnton headquarters, said that for his company to feel comfortable seeking a loan, he would need to add a large client.

“We are taking a very conservative approach to lending at this point,” he said.

Banks make lending push

As some companies resist borrowing – and banks push to strengthen earnings amid an era of record-low interest rates – Charlotte banks say the competition among them is fierce for new clients.

This month, Wells Fargo announced that it added about 1,500 bankers who serve small businesses and consumers from March 2012 to this past March. In January, Bank of America said it reached its goal of hiring more than 1,000 small-business bankers.

“The banks ... are all chasing after essentially the same groups of customers,” said Vitner, the Wells Fargo economist.

Indeed, many businesses say the loan offers are attractive.

Refinancing deals are often designed to steal away existing loans. Once a bank snags a new client, it can sell them other products and services. For example, the bank might seek to get the company’s employees to open checking accounts.

Some Charlotte-area small businesses say they are feeling the sales pressure.

“We do have a lot of banks calling on us. I get a lot of phone calls,” said Bratt, of Lucky Country.

“When banks come in to quote us terms, their terms are very aggressive,” he said. “Interest rates are low. I would have killed for stuff like that five years ago.”

Wynn Davis, managing partner of Mac’s Speed Shop, which owns three barbecue restaurants in the Charlotte area, employing roughly 50 people at each, said his banks are eager to lend him money, but he’s resisting. “We’re trying to be careful,” Davis said. “The less debt, the better.” The company’s total employment is around 250 and includes staff at restaurants in Fayetteville and Greenville, S.C., and office and catering workers in Charlotte.

Keith Leggett, an economist for the American Bankers Association, said the addition of small-business bankers is a sign that those financial institutions “want to make a bigger penetration into the small-business market.”

Greg McBride, senior financial analyst for Bankrate.com, said banks need to add them before, not after, there’s a bigger appetite for small-business loans.

“If you’re going to gain market share, you’ve got to be staffed up,” he said.

Good for the economy

Kim Reitterer, president of Charlotte-based Elm Engineering, which has 14 employees and was launched in 2005, is among small businesses deciding against growth now.

“Like many other small businesses, we are undercapitalized,” she said. “There’s so much more we could do if we had more money for marketing, more money to expand our reach.”

George McAllister, regional director of the Small Business and Technology Development Center at UNC Charlotte, which offers training and advice for Charlotte-area small businesses that have roughly $5 million or less in annual sales, said many Charlotte-area businesses are not ready to borrow, but: “There are a lot of business owners who don’t think they qualify,” he said. “Therefore, they don’t even ask. They might be right or wrong. Who knows?”

All of this means a lot of local business owners are not growing or hiring, McAllister said.

“So if you’re not growing, you’re not, typically, taking on more employees ... acquiring more assets and things like that,” he said.

Meanwhile, the unemployment rate in April in the Charlotte-area was 8.4 percent, compared with the national rate of 7.5 percent.

For Reitterer, it’s simply not the right time to get a loan that requires her to personally guarantee it. It is not unusual for a small-business customer to secure a loan with personal assets, typically their home, as collateral.

“Since 2008 there have been a number of small businesses that have failed,” she said. “Ours is not one of them. And we’re very grateful for that.”

Roberts: 704-358-5248; Twitter: @DeonERoberts
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