Also in this article: If you want to understand what's wrong with the economy, consider Deborah Moore. After working as a nurse-practitioner for 15 years, Moore launched a medical transcription company from her home seven years ago, mostly to be closer to her two kids. The company, called AccuStat EMR, has grown dramatically: Moore still handles transcription services, but she also helps hospitals transfer their records from paper files to electronic documents. Since the federal government wants most hospital records to be stored electronically by 2014, it's a booming business. Moore has big clients, like the University of North Carolina Student Health Center, Beth Israel Hospital in Boston, and the Missouri Department of Corrections, and her revenue in 2008 was $35 million. Her only problem? She can't get a loan.
Like most small businesses, AccuStat EMR needs credit to grow. Not much -- about $500,000, which Moore would use to buy computers in bulk. (Right now, when her clients need upgraded computers to store their records, she stands in line at Best Buy.) She has contracts lined up with Dell and HP but no cash to pay them.
Moore has tried both local and national banks, independent investors, and venture capitalists, all with no luck. Some banks didn't understand her business, and a few didn't give her a reason for their rejection, but many blamed her personal credit-fallout from a divorce eight years ago -- even though her company's financials were sound. Moore was named the Small Business Administration's person of the year in South Carolina for 2008 (and second runner-up nationwide) but couldn't even get a government-guaranteed SBA loan. "There's nowhere to go," Moore says. "As soon as you say, 'I'd like to borrow some money,' the door closes in your face."
Small businesses created more than 60 percent of all new jobs in the past decade; today, about half of all private-sector jobs in the United States are at small companies like Moore's. They generate more medical and technological patents per employee than big corporations, and history shows that they're the first to begin hiring at the end of a recession. In short, small business has long fueled our country's growth and expansion. But that's the insidious trap of the current credit crunch -- it's threatening to squelch American innovation, which could hold the key to our recovery.
Many banks are now so worried about their own survival that they're in lockdown mode. They have massive losses on their books from bad mortgages and investments that continue to lose value every week. That's why despite hundreds of billions of dollars in federal bailout money and widespread public outrage over their reluctance to lend it, the banks continue to hoard as much cash as they can. The tightfisted business strategy may help them stay afloat, but it also ensures that the recession will drag on. "It's always been hard for small businesses to get credit," says Marilyn Landis, a small-business financial consultant in Pittsburgh who also spent 30 years as a banker. "Right now, it's impossible."
It's a frustrating situation for entrepreneurs, like Lana Antonova, who are putting expansion plans on hold and watching opportunities pass them by. Antonova founded a Los Angeles-based Web-design firm called Web Vixxen in 2003 and has local clients like restaurants and interior designers, plus big companies like Electronic Arts and Ford Motor. So far, her revenue is comparatively small, with just $150,000 in annual sales, but not bad for someone who has relied largely on word of mouth to drum up customers.
Last year, Antonova was ready to take her business to the next level with a marketing campaign. But she needed $25,000 to do it. She tried four banks. A few places recommended taking a personal loan, but each application she filed put a tiny dent in her credit, and those dents added up. "It gets tagged onto your personal file, even though it's a business loan," she says. "It's a catch-22." One place finally approved her for just $3,500, but the 14 percent interest rate was too high. "I keep looking, but I think I'm going to hold off for now," she says.
In it for the Long Haul
Casey Hakenkamp of Lincoln, Nebraska, owns a trucking company with seven trailers and ten employees. He hauls refrigerated goods, mostly beef and pork from meatpacking plants in Nebraska, though he also has trailers that carry oversize freight. In 2008, his company did $1.3 million in sales. Hakenkamp recently got a call from a company coordinating shipments of wind turbines for GE. His experience hauling big cargo makes him a perfect candidate for a lucrative contract. "When you put up a wind blade, it has a 20-year life span, then they have to dismantle it and start over," he says. "It's a constantly evolving technology, and there's going to be a constant need for these trucks. If you can get the loan, you're in."
Unfortunately, Hakenkamp can't get the loan. The specialized trailers capable of hauling those blades cost $150,000 each. He can come up with only $30,000 on his own. GE Commercial Finance, another part of the corporate giant, has balked at lending to him, though he has borrowed from the firm in the past and always made his payments on time. "We bought five refrigerated trailers in late 2007," he says. "That was $272,000, and it took us two days to get approved for it, on a phone call."
Hakenkamp filled out 27 loan applications to buy a less expensive trailer and keep the rest of his business going. The banks rejected every single one. Ultimately, he and his wife bought the trailer under their own name. "We had to," he says. "It was the only way." Their personal credit score has taken a hit. But it's the cost of growing a business in today's climate.Starting with Self Interest
On the outskirts of Atlanta, Jean-Pierre Jobin has come up with an unusual arrangement to get credit for his employment service: He's paying a bank to lend him his own money. Jobin's firm, Xpect Service, places IT support people at big companies. It's a growing business because it aids corporations in replacing full-time employees with independent contractors.
But in fall 2008, just as his company was gaining momentum, his bank, Alpha Bank & Trust, went bust. "My banker disappeared on us," he says. So, too, did Jobin's line of credit, which he used to make payroll while waiting for payments from his clients. To replace it, he tried six banks. Finally, he struck a unique deal: He makes a cash deposit, for which he gets 4 percent interest, and the bank charges him 5 percent to lend it back to him. It's all in the hopes of establishing a track record of good credit so the bank will loan to him under normal terms in the future. "After six months or a year, they'll look at my financials again," he says.
Such creative approaches are an indication of how tough the lending environment has become. But they're also a positive sign to some business experts, demonstrating that American ingenuity remains alive and well.
"Entrepreneurs are problem solvers," says small-business expert Nell Merlino. Merlino launched the Make Mine a Million Dollar Business Race in 2009, with the goal of helping women start, save, or grow in business. She sees evidence that entrepreneurs are already adapting: One study found that 56 percent of small-business owners said in February that the credit crunch was having an impact on their company, down from 63 percent in October. "We're doing okay and, in some cases, more than okay," she says. "It's encouraging."
With low overhead and the ability to adapt quickly to changing situations, small businesses are lighter on their feet than larger companies. In the absence of traditional big bank loans, some are turning to community banks, while others are turning to nonprofit lenders. And some, Merlino notes, are "even growing their company on credit cards. Many of the most successful entrepreneurs have grown and thrived in an environment like this. There is opportunity. You just have to look harder."
Inventing New Sources
Certainly, Scott McIntosh isn't giving up. A longtime pipe fitter, McIntosh developed carpal tunnel syndrome from years of using a tubing cutter to slice through pipes. He saw electricians doing similar work with hacksaws to cut through the copper tubing used for routing wires around buildings. "You can only cut as hard as you squeeze," he says. "And I thought, Man, a lot of those guys are going to have carpal tunnel problems."
He figured there had to be a better way, and one night, he had the classic inventor's epiphany. He went into his garage at ten o'clock and four hours later had built a rough prototype for a cordless, handheld band saw. Most portable band saws are heavy and require two hands to operate. But McIntosh's would be battery-powered and light enough for a worker to operate with one hand. He made his model out of wood, with an old blade that he'd wrapped around wheels made out of lids from hand-lotion jars.
Turning that into an actual product took four years. The saw, called the X-Band, has been a hit: It has won awards at trade shows, Popular Mechanics named it one of the best innovations for 2006, and electrician trade magazines have loved it. X-Band is now distributed through Ace and True Value hardware stores, among others, and McIntosh's company, called Stout Tool, has 14 employees and $2 million in annual sales. More important, McIntosh recently signed a licensing deal with a major tool company. But he needs about $1.5 million to stay in business through 2009, until that deal starts to pay off. "We're just now at the point where we're going to be making our tool for the big boys," he says. "But we've run out of capital. Banks won't talk to us -- they only lend you money if you don't need it."
So McIntosh is now talking to unconventional lenders, like venture capitalists. And an economic development fund run by the state government in Michigan, where his company is based, may lend him money if he can prove it will create new jobs in the state. He remains upbeat. "I feel blessed that we have a compelling future," he says. "It's tough out there."
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