Microeconomics through the eyes of a microbrewer

A brewer in Oakland says he'd love to expand, if he could only get a loan. His story illustrates a common complaint among small business owners.

Kai Ryssdal: There are macroeconomic stories -- the Federal Reserve today and its pledge to stay the course is one.

And there are microeconomic stories. The day-to-day realities of businesses and consumers getting by. The Small Business Administration reported not too long ago that lending to small businesses was down last year.

Charlie Mintz explains what that means from a microbrewery in Oakland, Calif.

Charlie Mintz: At Linden Street Brewery in West Oakland, a red lager is fermenting inside a shiny kettle that looks sort of like a giant, silver crayon on its head. Nearby, co-owner Adam Lamoreaux surveys a drum-shaped cauldron in need of some scrubbing.

Adam Lamoreaux: Oh, right now we're cleaning the brew house. Basically after each brew we have to clean all the pipes and hoses, and obviously the tanks.

Mintz: So this is the fun part?

Lamoreaux: Brewing is a whole lot more cleaning than actually making beer.

Lamoreaux, 38, is a mellow former Navy engineer with a shaved head and a Rasputin beard dangling over his collar. His wife hates it, but the beard's a charm, safe from the razor until the day Linden Street Brewery, which opened in 2009, stops growing.

Lamoreaux: Every year we grow 200 to 300 percent.

Linden Street Brewery produces 2,500 barrels a year -- that's two kegs to a barrel. It has two employees. But Lamoreaux believes he can grow. His goal: 20,000 barrels a year, and 20 employees. But to get there he needs a loan.

Lamoreaux: So right now we probably need about a million dollars for the next phase that we're going through.

And banks, Lamoreaux says, don't want to give it to him. In 2009, his community bank, with a guarantee from the Small Business Administration, loaned him $200,000. But since then, the tap has been dry.

Lamoreaux: We talked to other community banks, and commercial banks, and then these economic development corporations.

In total, almost a dozen institutions. They all said no.

Lamoreaux: It gets pretty depressing really.

So why can't a business like Linden Street get a loan? We asked a banker.

Kimberly Hett: We look at a variety of different factors. There really is no one formula.

Kimberly Hett works for Chase Bank in Oakland. It's not, we should say, one of the banks Lamoreaux approached. 

Hett: We do look at first and foremost the business's cash flow. The second piece that we look at is collateral.

Another factor is debt. Remember that $200,000 loan Linden Street has? In the view of banks, that makes it riskier. But Lamoreaux says, it's a risk banks ought to be taking.

Lamoreaux: You know, hey some entrepreneurs may not make it. But some do.

Hett says her employer is lending plenty to small businesses. Chase defines a small business as one with up to $20 million in revenue. Hett says Chase, this year, is on pace to make $20 billion in these kinds of loans, up from the $17 billion in 2011. The other major banks say their small business loan portfolios are up too.

James Wilcox: There has been considerable discussion about whether in fact there is a credit crunch under way.

James Wilcox is a professor of Economics at Berkeley's Hass School of Business, and a former advisor to the Federal Reserve. He says it's clear that credit is tight for small businesses. Less clear though, whether it's too tight. 

Wilcox: Despite the various kinds of data we've got,  it's a very difficult proposition to decide whether there's a substantial number of credit worthy businesses  who can't get  credit on the terms that would seem warranted.

So are we a nation of Adam Lamoreauxs? A survey conducted by the Small Business Majority, an advocacy group, found that six out of 10 small companies had experienced difficulty getting credit.

Back at Linden Street Brewery, the question is more than an academic. Lamoreaux says he's going to keep chugging away, and hope the banks loosen up. If that doesn't work out, he has a back-up plan: A beer bar, in China.

Lamoreaux: I'm halfway joking with people when I tell them. I probably would educate the new millionaires of Shanghai what good beer is all about. And I probably would be a millionaire by now if I'd done that.

Of course if that were the case, he could lend himself the money.

In Oakland, I'm Charlie Mintz for Marketplace.

About the author

Charlie Mintz is a reporter in the San Francisco Bay area and contributor to Marketplace.
Log in to post5 Comments

The previous comments assert that highly restrictive bank lending standards for small businesses are prudent and justified sound business practices. The suggestion is that banks rightly avoid making loans that are less than adequately secured and supported by current cash flow.

I question why these same standards of risk avoidance are not similarly applied to the trading activities of the banks. Why are the banks willing to accept extraordinary high risk levels in their trading departments and exceptionally low levels of risk in their small business lending?

Assuming that banks have a particular level of capital risk for their combined operations at any point, why shouldn't a portion of that total risk be allocated from its trading activities to its small business lending activities? Who benefits from trading risk?

Wouldn't greater lending risk and less trading risk in our financial institutions create far more benefit for the economy and society?

Mr. Lamoreaux is confused as to what role banks should play in financing businesses.

"You know, hey some entrepreneurs may not make it. But some do."

Banks are not venture capital firms. He demonstrates a frustration born from a fundamental lack of understand about business and banks. A blase attitude about risks and who should bear them would send any lender way, not just the ones he's applied to.

With very few exceptions, banks lend against collateral, particularly if you're a small or medium business. It's really that simple.

If his business isn't making enough cash flow to finance growth, and he wants to grow faster than his cash flow, then Mr. Lamoreaux should raise some equity financing.

As a fellow small business owner I sympathize with Adam's plight. I am credit-worthy in every respect and like Adam, cannot expand my business and hire new workers, primarily because credit is simply not available from the banks. The Federal Reserve has pumped tens of billions of dollars into the banks, at least partially to encourage business lending, but despite what Chase and others may claim, small businesses- a traditional engine of job creation-remain largely shut out of the credit markets. Thanks to Charlie Mintz and Adam for helping to bring the real story into public view.

Why is it that so many pub radio biz stories have a theme of worthy biz owners who can't get loans? Did it ever occur to your reporters and producers that banks are in business to acquire funds through equity capital and deposits to lend out at a spread over those costs plus cover direct and indirect operating costs and bad debts? There are thousands of lenders out there so if someone can't get a loan then it is because it would be imprudent, so end of story!!! This is a capitalist society and money is available for resonable investments. No? Unless you have info to the contrary, pls stop feeding liberal pablum to the masses.

Charlie - An interesting question to pose for the bankers: would a loan to this business have been viable in the best of times?

I'm a CPA. My experience: even in good times, a bank would not likely lend $1m to a 2 person business. Too risky for banks - this is more of a "venture capital" / "private equity" / angel investor financing proposal. Not knowing more about the anticipated use of proceeds, I would think the owner could have more (but limited) success through equipment financing sources (vendor financing, leasing, asset backed lending). Likely would need personal guarantees, etc. - not sure this story is about current economic conditions...

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