Helping banks get back to the basics
A woman stands under a "Where's the Money" banner at an event sponsored by the Valley Economic Development Center in the Los Angeles area.
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KAI RYSSDAL: Here's the thing about running a business, you gotta spend money to make money. In an economy where credit, the ability to borrow, is still really tight, that can be a problem. For small businesses especially. They get a double whammy, because two years into a recession so many small business owners have bad credit scores. Which is where some creative lending comes in.
KQED's Rob Schmitz has more.
Rob Schmitz: Chereen Peretti thought she had a great idea for a business. She lives in an LA suburb popular among Israeli immigrants, many who don't speak English. So she dreamt of building a preschool with a Hebrew and English curriculum. Hoping to secure a loan, she wrote up a business plan based on research that confirmed her idea would be profitable. She presented the plan to banks.
Chereen Peretti: But the banks, I don't think they're that concerned about that.
Loan officers told Peretti their banks used to accept a home as collateral. Not now. Since the recession hit, banks are looking for something more -- additional properties or a large household income.
Peretti: So that was very challenging -- trying to go to a bank and just saying, "OK, of course I don't have income, because I'm starting up a business, and we would like a loan."
But banks are skittish about lending money. They've withstood huge losses after a decade of doling out easy credit. Marilyn Landis is former chair of the National Small Business Association.
Marilyn Landis: Small businesses were walking into their lenders, and slipping their high credit scores, and showing them the equity in their home and nobody was doing the tough work.
Prior to that era of easy credit, community banks required a lot more than a credit score. They looked at how long you lived in the community, who were your friends, they closely examined your business plan, they checked your math and they didn't let a computer decide the outcome. In hindsight, those were the good ol' days of lending. One lender hopes these tough times will bring it all back.
Roberto Barragan: Over the past 12-18 months, we've become the place to come to for direct business lending.
Roberto Barragan directs the Valley Economic Development Center. Banks may not be lending to small businesses, but they're willing to lend to his non-profit so that he can make the loans.
Barragan: Some of these banks are realizing, look it: We took a 10 percent hit on our small business loan portfolio. We're managing losses right now. We know we're going to come under scrutiny -- particularly TARP-supported banks -- but we need to do something.
In essence, banks have outsourced their lending to Barragan's center. US Bank, Bank of America and Merrill Lynch have already lent millions. They benefit by not having more potentially risky loans on their books. This formula, says small business expert Marilyn Landis, could serve as a model for lenders nationwide.
After all, the way these banks used to lend has served as a model for Barragan. Before signing off on a loan, his staff demands business plans, they look at management experience and a commitment to the community.
And that's how Chereen Peretti, the woman with a dream to build a pre-school, got a $35,000 loan from Barragan's center. She now runs Today's Montessori, a bilingual preschool with a long waiting list. She says the center's staff paid her multiple visits, carefully scrutinizing her experience and her business plan.
Peretti: It gave me a huge boost of confidence, actually, because I felt like these people see what I see and they understand that there's a need for this, and that it's unique and that we'll be able to recoup our costs.
Barragan's non-profit recently received $15 million from the city of LA to provide loans to small businesses. He's on track to lend five million of that by the end of the year.
In Los Angeles, I'm Rob Schmitz for Marketplace.