Last year was rough for Ray's Waldwick Pizza. The walk-in refrigerator broke down and so did the air conditioner. Sales had declined.
Fortunately for owner Siobhan Carrasco, a line of credit from Bank of America helped cover the $14,000 repair and replacement costs and she was able to keep the 20-year-old business open. But the unexpected costs maxed out her credit line and left her without a financial safety net. She applied in October to extend the line another $10,000 and was denied -- unfairly, she thought.
"I told them, we bailed you out and you won't give me a line of credit? I have $250,000 in equity in my home and I just wanted $10,000," she said. Carrasco said last month she hasn't tried other lenders and is hoping sales pick up and that nothing else goes wrong. "My sales are down 20 to 25 percent from 2008," she said.
Her situation is not unusual, judging by a recent Federal Reserve Bank of New York survey of 426 small businesses in New York, northern New Jersey, Connecticut and Pennsylvania that showed the credit crunch persisted amid "comparatively strong demand" for loans and "weakened applicant quality."
The survey found that 59 percent of the companies applied for credit compared with about 40 percent in pre-recession national surveys. Only half of the applicants received credit despite previous borrowing success, and many who did get approved received less credit than they sought.
According to the Fed, small companies employ nearly half of all Americans, account for about 60 percent of job creation, and historically have created more jobs than larger businesses at the start of economic recoveries.
The impetus for the survey, conducted over the summer and released in October, was concern that "contractions in business borrowing may be limiting the capacity of small businesses to play this critical role."
The poll also showed that strong sales and cash reserves were more important for loan approval than past borrowing success.
Promising signs
The most recent national statistics include signs that the credit crunch may be starting to ease. Though loans held by U.S. banks and thrifts continued to slip in the third quarter, according to the Federal Deposit Insurance Corp., the decline of 0.1 percent was the smallest in two years.
The Federal Reserve's most recent "beige book" informal survey showed that in the New York region, which includes northern New Jersey, some bankers tightened their lending standards and none had eased them. This was in contrast to areas such as Atlanta where bankers have eased lending standards.
New Jersey bankers insist that they are making loans, but there is still scant demand.
"Banks are lending money and doing it carefully," said James Silkensen, former co-president of the New Jersey Bankers Association. "Demand for loans from creditworthy customers is really low. A lot of businesses out there are waiting to see where the economy is headed and make sure it's on the rebound before they make any investments. They are hoarding their cash resources."
Some bankers complain that even as the Obama administration urges them to free up credit, federal regulators, concerned about rising bank failures, press them to be ever more cautious as bad loans remain a problem, Silkensen said.
"It's not an easy time for banks," he said. "In some cases we hear the field examiners are not getting the same messages the higher-ups are giving. Some are being really tough on banks."
The Fed survey found that some business owners did not bother applying for loans because of "perceptions of restricted credit availability."
Apolo Jewelers in Ramsey seems to be a case in point. Owner Paul Sarkisian said last month the family-owned shop -- which did not participate in the survey -- could use a line of credit to offer more custom work, but he was reluctant to seek a loan because business is slow. And without credit it's hard to acquire the inventory needed to boost sales, he said. "If someone wants a $25,000 diamond I can't get it at this stage," he said.
Two-thirds of the businesses that participated in the Fed survey saw declining sales in the previous two years. Furthermore, real estate values have declined, which makes it more difficult for businesses to refinance existing loans.
Some lenders that used to be willing to lend 75 percent of the appraised value of a commercial property now will only go up to 60 percent, for fear that property values will continue to decline, said Caren Franzini, chief executive officer of the New Jersey Economic Development Authority.
Thomas Shara, CEO of Lakeland Bank, said his bank still offers 75 percent loan-to-value ratios but it is harder to find qualified borrowers as weak cash flow and lack of retained earnings remain a stumbling block. At Lakeland, the amount of business loans on the books was virtually unchanged in the first nine months of the year at about $1.2 billion.
"A lot of companies we are seeing have three consecutive years of losses," Shara said. "That's the dilemma. They are either breaking even or losing money." And with the decline in real estate values "there is less collateral to lend against," Shara said.
Loan for solar energy
Joseph Silvestri, owner of Goffle Road Poultry farm in Wyckoff, seems to be the exception. He had no trouble getting a loan. The business, which employs 15, has remained profitable despite the recession and he received a six-figure line of credit to install a solar energy system in November that cost the company more than $100,000 even after federal and state grants paid nearly half.
He's been working with the same community banker, Diane Spinner, for 20 years, and he stayed with her when she moved to Bank of New Jersey in Fort Lee from his former bank, Rock Community Bank, which has since been acquired by a larger institution.
It also helped to have more than $1 million in equity in the Goffle Road property that's been in the family since 1948, he said.
"We are relatively recession-proof," Silvestri said. "People still eat."
