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One by one, three banks put the kibosh on Michael Kelner's plans to expand Hardcoat Inc., a decades-old St. Louis Park company that puts protective finishes on aluminum. One of them had him see two loan officers, he said, before packing him off to Chicago to see a third.
"We wasted literally months putting together pro formas, spreadsheets," Kelner recalls. "They made us jump through hoop after hoop after hoop and in the end said, 'This doesn't really fit our model.'"
Kelner finally got his loan from a fourth bank, but his frustration speaks to the ongoing squeeze on small business lending. More than two years after the official end of the Great Recession, lending to Main Street businesses in Minnesota is still down.
Outstanding small-business loans at the nearly 400 banks chartered in Minnesota fell 4 percent in the first three quarters of last year and were down 13 percent from mid-2008, according to a review the research firm Trepp LLC did for the Star Tribune. Bigger banks that make a lot of small-business loans in Minnesota but are chartered elsewhere -- including Wells Fargo and BMO Harris Bank -- collectively have shrunk their level of small-business loans across the country.
Whether this is about tight-fisted bankers or weak demand -- or some of both, as bankers and borrowers stare each other down -- is a matter of debate. Either way, the decline in money flowing to small businesses matters because they play a crucial economic role as both employers and customers of other firms.
The Federal Reserve Bank of Minneapolis says it's aggressively studying the problem. Ron Feldman, the local Fed's senior vice president of supervision, regulation and credit, called the falloff of lending to small business "the most important story" in banking and said the Fed is looking at the possible impact of bank regulations.
"This is one of the more important issues that we're looking at," Feldman said. "If bank supervision is part of the problem, we really want to stop that."
Trepp and the Star Tribune examined the financial reports that banks submit to the Federal Deposit Insurance Corp. (FDIC) each quarter. The FDIC defines small-business loans as commercial and industrial loans, and commercial mortgages, of less than $1 million.
To be sure, not every bank has seen its small-business portfolio shrink. Minneapolis-based U.S. Bank and TCF Financial Corp. in Wayzata stand out for growing them.
The U.S. Small Business Administration (SBA) has been pushing its government-guaranteed loans, and more banks are tapping them. Kelner, for instance, got his $4 million from Venture Bank, a community bank in St. Louis Park, via two SBA-backed loans.
Gov. Mark Dayton said in October that he would funnel $100 million to community banks to spur small-business lending.
Banks, some of which have publicly pledged to step up their lending to small enterprises, insist they're ready to make a deal. "Showing a really good loan to a banker is like showing cheese to a rat," said John Boyd, a banking professor at the University of Minnesota's Carlson School of Management.
Critics question whether demand is as weak as headlines suggest. Have lenders pulled the spigots so hard that creditworthy borrowers can't get the money they need?
That's a very tough question to answer, said the Fed's Feldman, because no one is collecting hard numbers. "That data is not knowable," he said.
Targeting the nation's mega-banks, protestors in the Twin Cities this past fall decried the drops in small-business lending and accused banks of taking bailout money but not injecting it back into the economy.
"We're still stuck not being able to find jobs and create businesses, while the people that crashed the economy ... are sitting on more money than any group of people in history," said Kevin Whalen, spokesman for Minnesotans for a Fair Economy, a group of community, labor and faith groups.
The Minneapolis-based Metropolitan Consortium of Community Developers (MCCD), a nonprofit that's a lender of last resort for higher-risk businesses, said some banks have said they are requiring three years of profitability from applicants, a major hurdle given the hit companies took in 2009.
"That seems to be an issue with a number of lenders," said Iric Nathanson, MCCD's financial resources coordinator. "They want the three years."
Nathanson said he's also seen some banks hiking the minimum personal credit score they'll accept from about 650 to 680.
Business owner Charlie Hutchinson, who got a $25,000 loan through MCCD, is more pointed.
"I've been through every possible channel with banks," Hutchinson said. "They say they have small-business loans for business and they get money from the feds, but they won't loan it to people that need it. I can't tell you how incredibly frustrating it is. The only solution is to not need the money."
Hutchinson's company, Gotta Go Gotta Throw Inc. in Golden Valley, supplies Frisbee golf gear globally. It's had double-digit growth in revenue and profits since 2006, he said. But he hasn't been able to land traditional financing, and he said the credit cards he tapped have wrecked his credit profile.
Hutchinson said he has searched high and low for a loan to roll up the credit card debt and expand his business, saying he has huge opportunities to expand his staff of 10 because of the sport's popularity.
Sure, banks may be afraid to take risks, Hutchinson said, but "aren't they supposed to? Isn't that their role?"
At Wells Fargo, which commands about a third of Minnesota's market for small-business loans, the national portfolio of such loans was 3 percent smaller in the third quarter than a year earlier. Its Minnesota portfolio shrank by a similar amount, the bank said.
Wells insists the drop is about weak loan demand, a symptom of hard times. The recession tore holes in the balance sheets of many small companies, making them less creditworthy. Business owners are busy paying down debt, not seeking new loans or higher lines of credit, bankers say.
"They're very cautious unless the business is in hand," said Laurie Paal, senior vice president and business banking manager for Wells Fargo's Twin Cities market.
Nearly all the banks interviewed for this article insist they have not tightened requirements on small-business loans. They say there are too few qualified applicants.
When one comes along, "there's a real food fight out there," said Doug Hile, chief executive of Chaska-based KleinBank. "We have more deposits than we know what to do with.
"There's been such devastation from this downturn, maybe people's attitudes toward debt have changed."
Seeking new business
U.S. Bank and TCF Financial have grown their small-business portfolios -- U.S. Bank mainly by grabbing market share, and TCF by launching a new inventory finance operation for dealers to buy gear from manufacturers such as Toro and Arctic Cat.
Nationally, U.S. Bank had $13 billion in small-business loans in the third quarter, up 5 percent from a year earlier and up 11 percent from mid-2008. That's largely consistent with the growth in Minnesota, said Craig Veurink, U.S. Bank's regional business banking manager for the Twin Cities. It's mostly about pulling customers from other banks, he said.
"We still aren't seeing a ton of our growth from business owners buying a ton of new equipment," Veurink said.
Smaller banks have seen growth too, such as Venture Bank in St. Louis Park.
"I wake up every morning and I say, 'God bless the big banks for the way they operate,'" President Michael Zenk said. "They don't do a great job of taking care of their small-business customers. They just don't."
Jennifer Bjorhus • 612-673-4683