Minding the Gaps: Pathway Lending and the Small Business Credit Crisis

Over the past few months the Federal Reserve System’s Community Affairs office hosted more than 40 meeting as part of an initiative titled ‘Addressing the Financing Needs of Small Businesses’. The goal of this series was to gather information and perspectives to help the Federal Reserve address the immediate and intermediate credit needs of small businesses.

On July 12, 2010 Ben Bernanke, the current Chairman of the Federal Reserve Bank, spoke at a capstone event to summarize the findings of this series of meetings. Below, is a summary of the identified credit gaps and how Pathway Lending can provide solutions for your business.

Identified Credit Gaps

Lines of Credit and Working Capital:
• Small businesses reported that existing lines of credit had been reduced, hampering their ability to offset lower cash flows that stem from slower sales or slower customer payments. As a result, small businesses reported that they had to scramble to meet intermediate financing needs and change their business models to adapt to less credit availability.
• Banks reported reassessing outstanding lines of credit in order to reduce their exposure to losses and minimize their capital needs. Banks also noted that small businesses had changed how they used their lines in the economic downturn, using them for major purchases and salaries rather than as short-term revolving credit. Some banks noted that, in such situations, they have converted lines of credit into term loans, which have higher finance costs.

• Pathway Lending provides expansion capital for the purchase of equipment, permanent working capital, inventory or lines of credit. Pathway Lending will finance up to 80% loan to value for equipment. Our other forms of working capital can range from one to five years and loan amounts are from $35,000 to $500,000.

Refinancing Credit:
• Small businesses expressed concern about their ability to refinance loans, particularly those related to commercial real estate. In some cases, business owners faced an immediate need for cash to repay the balance of their maturing balloon loans, even where the firm had an ability to repay the loan, because of reduced collateral values or tightened underwriting standards.

• Pathway Lending is a certified lender under the U.S. Small Business Association’s 504 Loan Program, which does allow for refinancing under certain circumstances.

Small-Dollar Loans:
• Several small business participants cited the need for small dollar loans, particularly in amounts under $200,000. Microlenders in some markets help address the need for loans under $35,000.
• Larger bank participants acknowledged that they reduced or curtailed small dollar loans altogether because of the expense in time and resources required to make these loans.

• Pathway Lending has originated more than 450 loans totaling more than $40 million to Tennessee small businesses since 1999. Loan amounts begin at $35,000, with an average loan size of about $125,000.

Commercial Real Estate:
• Banks reported that they suffered significant losses in their commercial real estate portfolios. One bank stated that 50% to 60% vacancy rates were not uncommon in his area. Many banks reported that they have tightened underwriting standards in this segment, including requirements for higher borrower equity, stronger debt coverage ratios, lower vacancy rates, as well as stronger personal guarantees.
• Small businesses confirmed these tighter loan standards and noted that, for existing loans, they were required to pledge additional cash or other assets to make up gaps created by commercial real estate that appraised at lower market values.

• Pathway Lending offers loans for building and land purchases for the acquisition of commercial real estate, construction or renovations of owner-occupied real estate. Pathway Lending can lend up to 90 percent of the property’s appraised value. We often partner with the U.S. Small Business Administration and USDA Rural Development so that our clients can take advantage of loan guarantee programs and flexible terms. Loan amounts begin at $35,000.

Patient Capital:
• Both banks and small businesses cited the need for sources of patient capital to assist small businesses in financing equipment and other large purchases. For capital-intensive businesses, such as manufacturing, a larger loan for equipment or materials needs a longer repayment period to provide sufficient time for sales to pick up and generate cash flow for repayment of the loan.

• Pathway Lending offers longer terms for its loans, up to 7 years or the useful life thereof for equipment purchases. As a Community Development Financial Institution, Pathway Lending also has the ability to negotiate with its customers and provide more flexible terms for repayment.

Loans to Distressed Industries:
• Banks reported that they are reducing their exposure to certain industries with high loss rates.
• Small Businesses affected by the reduction in credit within these industries expressed their frustration over their inability to secure loans regardless of the quality of their financial condition.

• Pathway Lending’s mission is to increase access to capital for businesses in distressed, or low- and moderate-income, communities. Pathway Lending makes loans when traditional banks will not. Visit our website for details.

Start-Up Capital:
• Small businesses and bankers agreed that start-up businesses have always had difficulty obtaining financing, and that now it is almost impossible to secure bank credit. At several meetings, participants noted an increased demand for this type of financing, particularly given the number of unemployed workers who are now looking to start businesses.

• Pathway Lending does not provide start-up capital. We typically require applicants to have industry-related experience in order to qualify for a loan. While Pathway Lending may not provide your business with the start-up capital it requires, there are many small lenders who will. Please visit Strategies for Small Businesses at http://strategiesforsmallbusiness.com/. Based out of California, this company provides loans, including start-up capital, to companies across the country.

If your business is growing, and in need of capital, we encourage you to visit our website for more details. There, you will learn more about our products, see if your company fits our lending profile, and have the opportunity to contact us directly.

Apply for a Pathway Lending Small Business Loan Now!