Why Banks Won't Lend to This Guy's Profitable BusinessBy
Turns out customizing video game controllers for gaming addicts who want to shoot faster can be a decent business. Tim Erven says his five-year-old venture, Custom Gaming in Whippany, New Jersey, has been profitable since he started it, with revenue around $300,000 in 2011, and some 250 orders a week now, mostly through its Amazon storefront.
To keep up with demand, the 22-year-old has been trying to get banks to lend him as little as $10,000 to improve his website and rent a warehouse near his home. The six banks he’s approached have rejected his applications because of his age and because he hadn’t gotten a business loan before, even though his tax returns show profits and his parents were willing to put up their home as collateral. “From what the banks told me, asking for 10 percent of my annual revenue was reasonable, and what tends to be conventional, but even by decreasing the amount I was seeking I was still unable to obtain approval,” says Erven, who juggles balances on six credit cards to manage cash flow.
Erven’s situation isn’t unusual for small business owners navigating post-crisis banking. A recent National Federation of Independent Business study shows that even while demand for credit is on an upward trajectory, the number of small employers able to land a bank loan has not moved in parallel. Bank credit for small firms (defined as businesses with annual sales of less than $50 million) has been ticking up, slightly, since the third quarter of last year, according to the Federal Reserve’s quarterly surveys of senior loan officers and other government data. “But it should be much stronger at this point in the economic recovery,” says Paul Merski, chief economist at the Independent Community Bankers of America in Washington. (Community banks make nearly 60 percent of outstanding loans to small businesses, according to the trade group.)
Before lending will rebound, of course, consumer spending and real estate prices have to improve. And tempering new underwriting rules is crucial, too, says Merski. At a community banking conference last week, Federal Reserve Chairman Ben S. Bernanke urged bank supervisors to strike a “delicate balance” between encouraging lending and avoiding a race to the bottom in loan standards.
Erven isn’t waiting for bankers to nail that balancing act. He plans to meet with Chinese private investors about raising capital from them and moving some of his production to China. “I’m either going to have to give a portion of the company or pay a high [interest rate],” says Erven. “I’d be able to get a much lower rate [from a bank], but that’s the reality of what I have to do to get the funding.”