As reported in the Wall Street Journal, banks continue to look at factors like positive revenue growth as their criteria for issuing loans.
However, the report by the Federal Reserve in New York also shows that many banks are paying more attention to the health of a company’s industry.
Regions Financial Inc. (RF), for example, is lending primarily to professional practices such as physicians, veterinarians, and accounting, law and engineering firms, which don’t depend on discretionary consumer spending.
That’s placed companies like Efficient Lighting Corp., a Buena Park, Calif., maker of energy-efficient light bulbs and light fixtures, in a sweet spot when it comes to securing credit. The four-year-old company, which powered through the recession thanks to tax incentives and government subsidies directed toward the green industry, expects annual revenue of $4 million this year.
Efficient Lighting secured a $500,000 credit line in March and an SBA-guaranteed real-estate loan for a $3.4 million industrial building in August from Bank of America.
Many of the top small-business banks issued more new loans to small companies in the third quarter. Wells Fargo & Co. (WFC), for instance, issued $3.9 billion, up from $3.3 billion in the same quarter last year. Bank of America Corp. (BAC) extended $5.7 billion to small firms, up from $4.1 billion last year, while J.P. Morgan Chase Co. (JPM) lent $2.7 billion in its last quarter, up 42% from $1.9 billion.
Although not necessarily targeting specific industries, much of the money is going to the “big” small businesses, banks say, those that tend to be larger, with cash and collateral on hand.
“The larger the business, the better they are doing,” says Kathie Sowa, who handles small-business credit at Bank of America, which last month announced plans to hire 1,000 bankers to work with small-business clients.
Meanwhile, the smallest companies—those with less than $1 million in annual revenue—”are not recovering at the same pace,” she says.
Banks say they are simply being cautious, as finding credit-worthy borrowers —no matter a company’s size or industry—is still a challenge. According to the Federal Reserve data, demand remains strong—59% of business owners tried to get financing in the first half of the year—but applicant quality has weakened.
Marc Bernstein, who heads the small-business division at Wells Fargo, says that the broadest problem in trying to extend credit is that business owners are still trying to pay off debt they accrued prior to the recession.
“We are really stretching as far as we can prudently stretch to approve as many as we can. We have an obligation to make sure they are repaid.”
Banks say they’re not ignoring the smallest businesses. At Bank of America, Ms. Sowa says the new bankers will be actively recruiting the smallest of businesses—not necessarily to extend credit, but instead to process their deposits and help manage their cash flow. That way, when they become ready for a loan or line of credit, the banking relationship will already be well-established, she says.
