If you have any doubts about the dreary climate of small-business lending, Gary Brown can easily put it in perspective.

Brown, a Texas-based CPA, recounted the unfortunate case of one client whose story is, sadly, emblematic of the current financing crisis for small-business owners facing increasing pressure from lenders.

"He was retired and spent a lot of money refurbishing an old house to open a restaurant," said Brown. "Suddenly, the bank demanded that his unsecured credit lines had to be paid off in five days and he had to come up with $250,000. He was forced to liquidate his 401(k) and took a huge tax hit. Afterwards, he was cramped so tight for cash flow that he was forced to close."

Brown, whose Georgetown firm services some 250 small-business clients ranging from mom-and-pop operators to companies with revenues of up to $250 million, revealed that he's had several clients forced out of business due to banks' no-notice call-ins of their credit lines: "We're seen some interesting things over the past years, from plenty of access to credit, to banks not loaning anything. The money is still out there, but it's very, very tight."

Indeed. In 2009, lending in the commercial banking sector declined roughly 24 percent.

Now, as the economy limps toward recovery, larger businesses have more easily been able to raise money in the markets, but the small-business sector, which traditionally had relied primarily on banks or finance companies for loan products or the Small Business Administration's 7(a) and 504 (real estate and equipment purchase) loans, has found that once-flowing lines of capital have either dried up or been severely constricted by tighter guidelines and requirements.

That credit malaise was amplified when CIT Group, the Fortune 500 lender to the small-business community, filed for bankruptcy last November.

As a result, small-business owners are turning to non-traditional sources of financing such as factoring, where a company sells its invoices to a lender, or to new players that have emerged, such as the New Orleans-based Receivables Exchange, an online "auction" site where business-to-business companies sell their invoices to institutional investors submitting the highest bid. As evidence of the soaring popularity of non-traditional financing, the company reported a 66 percent growth in receivables for March alone.

And earlier this year, President Obama put forth a proposal to steer some $30 billion from the TARP bank bailout program into a lending fund for small businesses. The fund would be limited to banks with $10 billion or less in assets. Obama also called for expanding the size of loans made through the SBA Express program from $350,000 to $1 million.

Brown, for one, often advises his small-business clients to work with local and community banks, rather than the national brands, as he says they're usually easier to work out terms if you have a viable company.

BANKS: "WE'RE COMMITTED"

"There is this perception out there that the underwriting standards have changed, but they really haven't," said Kathie Sowa, who oversees small-business lending for Bank of America. "As banks, we're relying on scoring models, we're looking at cash flow and secondary sources of payment. But there's a lot of business sitting on the sideline. The economy has changed the picture for many small businesses, so they may no longer qualify, but we're very committed to that sector."

She said that BOA lent more than $80 billion to small businesses over its last fiscal year, versus $50 billion for the prior year, and $19 billion in its most recent first quarter, some $3 billion over the prior-year quarter.

"Banks are always looking at empirical financial data," explained Jordan Peterson, a senior vice president and credit manager at PNC. "But at the end of the day, it comes down to cash flow. We want to lend, but a lot of times, we're looker at results that are weaker than they were even a year ago."

Peterson said that PNC lent $4 billion in fiscal 2009 to businesses with under $10 million in revenue.

"But we're not waiting for people to come in," he said. "We have all our bankers and direct-sales force trained, and there's 700 of them talking to small-business customers in what we call the 'cash-flow conversation,' where we identify the best loans and products for their business. But demand is down. A lot of small businesses are waiting to see improvements in revenues before they're willing to borrow. But we do look for ways to say 'Yes' more often. We have a second-look process for every application. Even if an underwriter says 'No,' a team leader looks at it."

THE CPA FACTOR

Though bankers may debate claims of whether stricter lending guidelines and access to capital have choked off many deserving recipients who may have easily qualified three years ago, all are unanimous in their position that no business owner should go before loan officers or credit managers without having their statements prepared by a CPA.

Often the CPA acts as the conduit to the bank, inquiring about banks' credit underwriting, what statements they require and helping their clients prepare for the loan process.

"One of our biggest wishes is that every one of our clients has a CPA," said Melody Stallings, a senior vice president and division manager at Wells Fargo Capital Finance. "Even a small company who uses a CPA for compilation and review. The more thorough the information that [the business owners] provide, the more flexible we can be in our lending decisions."

Neville Grusd, a CPA, chartered accountant and president of New York-based factoring concern Merchant Financial Corp., said that one of the big obstacles to working with small companies comes when they give him internal statements or basic tax returns in lieu of a review statement prepared by an accountant.

"I need to look where you are today as a starting point and then get a projection," said Grusd, who added that his loans typically range between $500,000 and $4 million. "Show me your customer lists and if I see a viable business, I will put in place a credit line with a formula based on your accounts receivable. It's hard to do that without the help of a good accountant."

BOA's Sowa agreed: "One thing CPAs do for small businesses is to improve the quality of the financial reporting, instead of relying only on tax returns and annual statements."

Toward that end, Texas CPA Brown said that he has provided in-house training sessions for small-business his clients on how to get money. "We've done this now for 10 years, but it has ramped up lately," he said. "We teach them how to clean up their balance sheets, how to apply for and obtain funds - whether through traditional financing, "angel" investors, inventory financing and selling receivables. I had one client who had golf carts. I showed him how to factor his inventory and sell his receivables and now he has extra cash. We also show them how to talk to the banks and put together a proper package showing their business picture and what the business is doing."

Despite the turbulence of the past 18 months, most practitioners and bankers agree that things are picking up for small businesses, albeit slowly.

Said PNC's Peterson, "We're seeing some recovery, not as fast as we'd like, but there definitely are some positive signs."

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