A Search to Secure
Small businesses receive fewer loans from big banks, forcing them to find alternate avenues.
Cody Maltais has been a musician, a Marine and a craft-brewery entrepreneur, but his dream job only recently came to fruition.
Tucked in the corner of an all-brick shopping center in Durham, Maltais’ latest business venture, Elevate Mixed Martial Arts Academy, launched in February. It took 83 days for Maltais, his wife and father-in-law to lay out and furnish the space with martial arts essentials: gray training mats that span across a studio platform, sleek locker rooms emitting a fresh scent and an administrative desk — all with a modern feel that doesn’t scream trying-too-hard feng-shui.
“I’d leave work and then work five or six hours that night and then head home and do that over and over and over,” Maltais said. “My wife was here every day, with a baby strapped to her back, working.”
Maltais gives a firm handshake, and for the most part, has the disciplined yet warm, patient manner of the martial artist that he is. His calm demeanor becomes a little more lively when he talks about the things he loves: his daughter Addison, his wife and his new martial arts academy.
A $45,000 loan from the U.S. Small Business Administration (SBA) approved last summer locked in Maltais’ startup vision. Unlike many small business owners, Maltais, a seasoned entrepreneur, knew what to expect from the funding process.
In 2011, Maltais dove into the loan process to secure financing for Carrboro’s Steel String Brewery, which he opened along with a couple of long-time friends.
“We went around, and we sought Bank of America, we sought Wells Fargo, we had this detailed 90-page business plan going through every aspect we thought was even borderline relevant,” Maltais said. “And they all were like, ‘Wow, you guys did a good job. There’s no way we’re going to lend you money. We don’t do startup lending.’”
Maltais then switched over to successfully receive SBA-backed loans through a Chapel Hill-based bank. And come 2015, when he was seeking a loan to support Elevate MMA Academy, he knew whom to avoid.
Small business owners like Maltais are increasingly turning away from big banks and toward alternative lenders. The biggest banks are making far fewer loans to Triangle-area small businesses than they did in the previous decade.
In Durham, Orange and Chatham Counties, the five largest North Carolina banks ranked by deposits issued 114 SBA loans from 1996 through 2005. These banks made 51 loans from 2006 through 2015, a 55 percent dropoff, according to an analysis of SBA loan data.
Together, five of the largest North Carolina banks lent $9.6 million from 2006 through 2015 to small businesses in these counties, down 50 percent from the preceding decade.
Since the 2008 financial crisis, bank lending has recovered overall for big businesses, or businesses with more than $1 million in assets, said DePaul University finance professor Rebel Cole, who has extensively analyzed credit to small businesses. Meanwhile, though, small businesses have slid behind.
“That’s a real problem because small businesses are the lifeblood of the economy,” Cole said. “If they can’t get credit, they can’t grow.”
Last year was still a big one for small business lending from Wells Fargo.
Among North Carolina’s five largest banks, Wells Fargo made the largest sum of SBA-backed loans to Durham businesses in 2015, amounting to $2.8 million, or 30 percent of loan money granted over the past decade across Durham, Orange and Chatham Counties.
David Booth, Wells Fargo business banking manager in Cary, said the bank has seen double digit growth in small business lending over the past couple of years.
“These are your mom-and-pop type of condos (and) retail that are looking for loans,” he said.
Booth said during the financial crisis, a lot of small businesses pulled back, but over the last two or three years, Wells Fargo has seen an uptick in demand.
“We had a lot of clients…say, ‘we’re going to put off this piece of equipment or this fleet of vehicles because we just aren’t sure of health care, we aren’t sure of the economy,’” Booth said.
Other banks are less interested in small business lending because it isn’t as profitable as loans that follow simpler approval processes, such as credit cards. Cole said the credit card has become an increasingly common loan source for small businesses. Rates on cards issued to businesses average 13.12 percent, according to Creditcards.com.
Small businesses might choose alternative funding sources such as online lenders if they opt out of the SBA loan process, said Chris Kwiatkowski, head of government-guaranteed lending at Yadkin Bank. In fact, non-bank lenders increased their chunk of the market to 26 percent from 10 percent, according to PayNet.
“If you go to these online lenders, the interest rate is going to be much higher,” Kwiatkowski said. “They’re well above 20 percent.”
To be sure, some non-bank lenders also issue SBA loans, and they charge higher interest rates than banks. When beginning Elevate MMA Academy, Maltais went to the Support Center, a Raleigh-based nonprofit that provides small business loans and financial training to startups. The Support Center charges rates of 7 to 12 percent.
“So (we’re) paying a lot more to get the money, but they were willing to take a bet,” Maltais said.
Lenwood Long, CEO of the Support Center, said alternative lenders’ rates are higher due to the high cost of raising capital and the risky borrower’s debt.
Forty percent of the Support Center’s lending is from startups, Long said.
“The problem with startups is they…tend to like capital,” Long said. “The biggest impediment is collateral. We’ve been fortunate to have a loan fund certified and approved by the SBA to the Community Advantage loan program.”
The Community Advantage Program is part of the SBA’s 7(a) initiative and is aimed at increasing the number of SBA lenders who reach underserved communities.
Cole said it’s important to consider that, even though some big banks might argue it costs just as much to underwrite a $100,000 loan as it does to underwrite a $10 million loan, small business lending provides diversification.
“They’re more risky, but if you’re making 100 loans to small businesses, you’re diversified. So your pool of loans is less risky,” Cole said.
And sometimes risk reaps greater rewards — even for startups. If Maltais’ martial arts academy follows the trail of his first small business venture, Steel String Brewery, it might have a long life ahead of itself.
Maltais seems confident it will.
“Right now we have 20 members,” Maltais said. “We’re heading in the right direction for sure.”