Our troubled economy

Credit crunch knows no bounds

  • Article by: TODD NELSON , Special to the Star Tribune
  • Updated: September 21, 2008 - 10:42 PM

From Wall Street giants to small entrepreneurs, it's getting harder to find cash.

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There was cake Thursday at the dedication of the Great Streets initiative. “This collaboration demonstrates our commitment to the residents of north Minneapolis to create a vibrant, thriving business community,” WomenVenture President Tené Wells said. Wells is a lifelong North Side neighborhood resident.

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As Wall Street's credit crisis ripples through Main Street, small-business owners face a harder time financing their firms. Entrepreneurs are finding their business plans and cash-flow projections under much greater scrutiny, as are their business and personal finances, according to small-business owners, business consultants and others interviewed recently.

Lenders also are taking a closer look at collateral, and appraisals of business assets and real estate are coming in far below where they would have been in the recent past. And even when loan approvals do come, they are taking much longer to get.

Banks in the Twin Cities and greater Minnesota are generally sound, said Prof. David Vang, chairman of the finance department at the University of St. Thomas Opus College of Business. But they have become much more cautious about making loans. That's because, with Wall Street's big investment banks melting down, regional banks no longer can count on selling their loans in the secondary markets.

Whatever loans the banks make, "it's likely they're going to have to hang on to them in their own portfolios for a long time," Vang said. "They can't just automatically bundle it and sell it to someone else."

The credit tightening, which has come over the past 12 to 18 months, preceded last week's drama involving Lehman Brothers' bankruptcy and the bailout of American International Group, Vang said.

"My gut would tell me that, by the end of 2009, we'll probably see some fairly strong recovery, some growth again, because it will probably take that long for the last of these firms to finally take the lumps for the risks they took," Vang said.

Banks are more cautious and loan-related expenses are rising, said Stephen Soderling, principal at Tonka Bay Equity Partners, a private-equity firm in Minnetonka. The firm, which has $200 million under management, typically invests in companies with $10 million to $60 million.

Lenders are "definitely more conservative," Soderling said. "The amount of capital they're willing to lend these businesses is not as abundant as it once was. I think what happened [last week] probably will exacerbate that, but time will tell."

Ronald Ward of RSW Management Inc. in Balsam Lake, Wis., has seen the credit-tightening firsthand. For six months he's been trying to borrow $10 million to remodel and expand a packing plant his company owns in Iowa. Last year, he thinks he probably would have gotten the money within a month.

"We've got good net worth, my partner has good net worth and we've never had a bad loan in our life," Ward said. "We've got the cash flow to prove and support it. It's going to increase efficiency, which will create even better cash flow."

One obstacle Ward has encountered is that the building and the business, which has 160 employees and millions of dollars' worth of equipment, are getting appraised at what he called salvage value.

"The banking system can't shut down all credit or you'll shut down the economy," Ward said. "If you're not careful, you fulfill your own prophecy. You have to have faith in small businesses, you can't pull into a shroud and stop all credit. The reality is this may be affecting the growth of our economy."

Seeing both sides

Both sides of the deepening credit crunch are playing out at WomenVenture, a St. Paul-based nonprofit that helps clients -- women and men alike -- become worthy borrowers as they seek financing. As a community development financial institution, the nonprofit also makes loans to small businesses.

"We're seeing the ability to get credit is tightening further," said Carol Jean Peterson, a WomenVenture business consultant. "Because it's coming on the coattails of the subprime mortgage crisis, it's a double whammy for business owners. Many entrepreneurs had been using home equity to start businesses. And in a lot of cases, that equity isn't there anymore."

At the same time, credit is available at low interest rates to businesses that are doing well, Peterson said.

"If you have a good credit score, and if you have money to invest in a business and solid collateral, a solid business plan and realistic cash-flow projections, it's a really great time to borrow money," Peterson said.

On the lending side at WomenVenture, the organization is taking a much closer look at the creditworthiness of individuals applying for credit, President Tené Wells said.

"We were able to lend to people based on character and the feasibility of their business plans," Wells said. "We made risky loans. Now my board in some cases is saying that we have to protect the assets of the organization. And we don't want to make a loan that's going to put a person in a worse financial situation than they would have been had they not started this business."

One response, Wells said, has been to make smaller loans of, for example, $5,000 instead of $15,000. WomenVenture also is seeking more grant money, which the organization would not have to repay if the borrowers failed to pay off the loans, Wells said.

North Side initiative

Easing the credit crunch somewhat and simplifying starting or expanding a business in economically struggling north Minneapolis are among the aims of a partnership announced Thursday by WomenVenture, U.S. Bank and the city of Minneapolis.

Using $22,000 from the city's Great Streets initiative, WomenVenture will provide free business classes and consulting at U.S. Bank's branch at 1030 W. Broadway to potential and existing business owners.

WomenVenture also will provide loans of as little at $500 to cover start-up costs for inventory, rent payments or building expansions. Working with U.S. Bank, the nonprofit also can make larger loans to north Minneapolis entrepreneurs who open new storefronts or improve their current locations.

"This collaboration demonstrates our commitment to the residents of north Minneapolis to create a vibrant, thriving business community," said Wells, a lifelong neighborhood resident who has seen home foreclosures, business closings and rising crime take a toll there.

Todd Nelson is a freelance writer in Woodbury. His e-mail address is todd_nelson@mac.com.

  • about this series

  • The Star Tribune's coverage of the housing crisis, the credit crunch and their effect on Minnesotans.

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