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Like Banks, Commercial Lenders Also Tightening Credit To Small Businesses

Tribune photo by CLIFF McBRIDE

Business owner Scott Tashkin has to work hard to find new lines of credit to keep paying his employees.

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By MICHAEL SASSO | The Tampa Tribune

Published: March 27, 2009

TAMPA - Some small and midsize businesses lately are ready to strangle their bankers, saying they've cut off lines of credit and called in loans.

But bankers are in good company among growingly tight-fisted financiers. Behind the scenes, lesser-known "commercial finance" firms often are the ones actually cutting off money to Bay area and Florida businesses.

One Tampa staffing company, Construct Corps, had to scramble in the fall when its commercial finance lender, Textron Financial, suddenly decided to stop lending money to most businesses and focus on its other operations. Textron also owns Bell Helicopter and Cessna Aircraft.

Construct Corps owner Scott Tashkin started to wonder how he was going to meet his weekly payroll expense.

"We were looking forward and saying, 'If this continues, how do we handle the situation?'" Tashkin said.

Commercial finance companies aren't as well known as Bank of America and JPMorgan Chase, but Textron, GE Capital and CIT Group provide loans to thousands of businesses, especially those that don't qualify for bank loans.

Also known as "asset-based lenders," these firms reported an estimated $545 billion in outstanding loans nationwide in 2007, according to the Commercial Finance Association.

They usually rank second in the pecking order when businesses look for money to grow, to buy inventory or just to hold them over until they get paid, said Brian Smith, managing partner in Tampa of LCG Capital, an investment banking firm.

A business first will try to get a bank loan because banks usually have the best interest rates. Next, it will turn to commercial finance companies, who charge slightly more for loans and credit lines, said Smith, who formerly worked for Textron.

As a next resort, a business might other levels of financing such as "factoring" companies, which charge higher rates for loans.

Complicating things a bit, commercial finance companies aren't always at arm's-length from banks. In many cases, big banks such as Bank of America and JPMorgan Chase own commercial finance firms.

In recent years, commercial finance companies have become more popular with business. The Commercial Finance Association surveys its 20 largest members on their lending patterns every quarter. Until mid-2008, the companies continued to increase credit to businesses.

For example, in the first quarter of last year, credit extended to businesses rose a strong 5.6 percent over the previous quarter. The trend started turning negative in the spring, when committed credit lines fell by 3.6 percent. In the fourth quarter, committed credit fell by 1.9 percent.

They're cutting back partly because commercial finance companies are having a harder time getting money themselves. They often get money from banks and investment firms and then turn around and lend it to businesses. But lately banks aren't allowing them to borrow as much, or they're charging too much money.

John Gullman, a vice president for Fifth Third Bank and a leader of the Commercial Finance Association's Florida branch, said things have slowed in Florida as some lenders have pulled out of the market. One Atlanta company, Presidential Financial, had many small business clients in the state but essentially stopped marketing here.

Gullman said other commercial finance companies are picking up the slack.

"Florida will be OK in six months," he said.

For now, some small and midsize businesses are sweating it.

Tashkin, the Construct Corps owner, had to hustle in the fall when he learned of the Textron departure. As it wound down operations, the company kept cutting his line of credit, which had been as high as $4 million. Construct Corps is a staffing company that supplies skilled construction workers around the country. It uses its credit line to pay employees while it waits for payment from contractor clients.

Tashkin hired LCG Capital to help him find a new source of money and he eventually got it from Presidential Financial. That deal fell through, though, when Presidential cut back. Eventually, he landed a deal with a New York company, Capital TempFunds, which appears to be holding up, he said.

For a while he feared the worst – that he wouldn't be able to pay employees. But he said he never missed a payroll.

"My assumption is if you don't pay the guys in the field, the guys are not going to work with you," Tashkin said.

Reporter Michael Sasso can be reached at (813) 259-7865.

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