Missouri small businesses find it tough to get loans

Thursday, October 16, 2008 | 6:41 p.m. CDT; updated 9:01 p.m. CDT, Thursday, August 6, 2009

COLUMBIA — In this uncertain economy, chocolatier Alan McClure is bucking the trend by  borrowing money to grow his small business.

The owner of Columbia-based Patric Chocolate said he is overwhelmed by orders for his handmade $5.75 gourmet dark chocolate bars. 

Even as economic clouds darken, rave reviews by national food magazines have encouraged demand for his organic and fair-trade chocolate, made in micro-batches from Madagascar cacao beans.

He said his company is only one of about a half-dozen companies in the U.S. producing this rare “bean-to-bar” specialty sweet.  To meet the demand, McClure recently took out a 7 percent small business loan to expand his four-person staff and purchase new equipment.

Businesses like McClure’s are rare because mid-Missouri lenders are creating more hurdles for small businesses to borrow cash, often preferring to lend to only the most promising or credit-worthy, said Jay Edwards, senior area manager for the Small Business Administration based at the University Center for Innovation and Entrepreneurship.

“(Bankers) are afraid they might not have any money left to loan,” he said.

Edwards added that business owners are worried frugal customers will stop spending, so business owners are reluctant to take on debt to expand even if they qualify to borrow.

Industry studies support his analysis. In September, eight in 10 business owners surveyed for the Wells Fargo/Gallup Small Business Index reported that they thought current economic conditions would affect their business, according to a news release. The survey’s index was at its lowest since its inception in 2003.

A quarter-annual Federal Reserve poll published in July reported about 60 percent of the banks surveyed had already tightened lending standards on commercial and industrial loans for large- and middle-market firms. Sixty-five percent of those lenders added that they had also restricted their stands on loans to small businesses.

“The whole parade has sort of stopped,” Edwards said.

Robert Tucker, owner of Tucker’s Fine Jewelry in Columbia, said he chose not to borrow to expand his business. Instead, he said he sold about $500,000 of real estate to finance the expansion of his store in a North Providence Road location four times the size of the original Broadway store.

“Why even do it? Why mess with it?” Tucker said. “It seems harder and harder to even try to get a note from a bank these days. Unless you have an 800 credit score and 50 percent down, (banks) don’t want to touch it.”

The Small Business Administration guarantees a percentage of agency-backed loans made by banks to small businesses, defined as those with fewer than 500 employees. In the last fiscal year, which ended Sept. 30, the administration saw about 30,000 fewer loans, a 30 percent drop in its principal lending program, said June Teasley, a regional administration official.

Mid-Missouri mirrors that trend. For the eastern Missouri region that includes Columbia, the regional Small Business Administration recorded only 710 loans in 2008 – a third fewer than 2007.

A review of regional bank quarterly call reports shows that decline means hundreds of thousands of dollars are not being pumped into local economies. Since the 1990s, the U.S. has become more dependent on job creation by small businesses, which now account for 60 to 80 percent of new jobs nationwide annually, according to the Small Business Administration.

Virginia Wilson, a counselor at the Missouri Small Business Development Centers, said she assists small business owners in getting loans from regional banks. She anticipates new businesses will have a harder time finding funds than in previous years.

“It depends on the type of business that they’re starting. I think that will play a big part," she said.

Local bankers, who were not significantly affected by the subprime mortgage crisis, said small business owners are increasingly reluctant to borrow – and that’s why the SBA numbers are down.

Andrew Beverley, chairman and CEO of First National Bank & Trust Company, said community banks, which primarily take local deposits and provide home loans, are offering the same interest rates and loan amounts for small business loans as in previous years. 

Judy Starr, chief financial officer of Boone County National Bank, said inflation and the worsening economic picture have had a particularly chilling effect on regional entrepreneurs.

Just six years ago, food entrepreneurs like Linda and Richard Loaiza of Holts Summit found a lot of promise in  the regional economy. They received business plan assistance from state small business development officials to help turn their homemade salsa recipes into a booming business. ValRich foods shipped its first jars of La Casita salsa in January 2003.

But in August 2008, they closed the doors of their Jefferson City facility, citing higher freight costs and increasing rent.

“Our pricing on small goods just went sky high,” said Linda Loaiza. “It was a culmination of different things. Our cost and profit margins weren’t there.”

Wilson, of the Missouri Small Business Development Centers, said it's possible that the worst is still yet to come – though she couldn’t specify when.

“When it trickles down enough to the Main Street level, when people aren’t going into restaurants, when they’re not buying from small businesses, that’s when we’ll see it,” she said.  “I don’t think it’s gotten quite to that level, yet, at least not in mid-Missouri.”

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