One of the key challenges facing independent bookstores — and indeed, most any small business owner — is gaining access to capital. By guaranteeing certain types of small business loans, the Small Business Administration has made it easier for small businesses to gain access to credit from their local lenders, but ”easier” is a relative term. The reality is, for many bookstores the task of getting a small loan is, if not impossible, remains an uphill battle.
Ann Marie Mehlum, associate administrator of capital access for the U.S. Small Business Administration, knows all about how tough it is for small business owners to secure loans. She spent more than 35 years in banking. For a decade, Mehlum was founding president and CEO of Summit Bank in Eugene, Oregon. She also served as senior vice president and chief of credit administration at Siuslaw Bank in Oregon and vice president of Manufacturers Bank in San Francisco. In July 2013, Mehlum was picked to head SBA’s Office of Capital Access.
Mehlum recently spoke to Bookselling This Week about issues of concern to ABA members, including what SBA is doing to help independent bookstores gain access to capital and best practices that booksellers can use to increase their chances of success.
BTW: What do you see as some of the biggest challenges facing small businesses — and very small businesses — when they apply for a loan? Are there common mistakes that businesses make? Any best practices to keep in mind?
Ann Marie Mehlum: I think one of the problems now is that very small loans are difficult for financial institutions to make. I think [bookselling] is also an interesting industry because there are misconceptions about what is happening in the industry, that books are going away and everything has to be electronic. I think part of the challenge in your industry is to get the word out about books. Books aren’t going away. [The industry is] clearly changing … but for booksellers who contact lenders for credit, I think it is important that they articulate what their niche is, why it is that people are going to continue to buy their books, and what they are doing differently. They need to be able to tell their story and to talk about it in a way that instills confidence in a future revenue source for a lender.
BTW: You said it was difficult for banks to make small loans. Why is that?
AMM: I think it’s becoming an economies-of-scale issue. There is so much more regulation for lenders. When you think about Dodd-Frank alone, one bill was more than 2,000 pages of new regulations … Those regulations for the most part apply to every lender and to every loan, so the cost of making every loan went up. When you are making a $25,000 loan versus a $2.5 million loan — the costs are similar and yet the revenue is much different — you can understand why banks in general are moving up their minimum loan levels — and that is frustrating. It’s frustrating for everyone…. I really think that’s the biggest reason.
BTW: Can you discuss some of the best practices that can help booksellers increase their chances of getting a loan?
AMM: In my personal experience as a banker, it was important that the borrower had analyzed all the risk areas and could talk about how he or she planned to mitigate the areas of risk.
It’s important to educate the lender — educate the banker on what is happening in the industry, challenges and trends.
Bankers want to make sure that businesses have a plan that makes sense and is reasonable. They want to see that the bookstore owner has the team in place to carry out and execute the business plan, which includes marketing, financial management, operations, and, in some cases, collateral. The main thing is for the business owner to be able to say, “This is what I’m going to do and how I’m going to do it, this is how much money I need to borrow to do it and this is how I’m going to pay back the loan.”
The other thing is for business owners to be able to talk about their track record. If their track record isn’t so good, what’s going to be different now? If their track record has been good, articulate the reason behind the past performance.
BTW: Is there help at the regional level for this?
AMM: Yes, and I would strongly urge a bookstore owner to start with their SBA district office. There are also small business development centers that are helpful. SBA has district directors who know the local lenders in their markets and what types of loans they generally make, so they can make a referral to a bookstore owner. They can also help them with their business plan and help them get ready. We call it being “credit ready,” and our [regional offices are] resourceful in that regard.
We have a pilot program underway in Michigan [Getting to Yes! a program that prepares clients to secure debt financing]. The program was developed in response to concerns raised by small businesses in urban and rural Michigan. The district office there is working with businesses on a 39-day program that gets small businesses “credit ready.” Part of the program involves a group of [volunteer] lenders … who form a mock loan committee where borrowers go in with their business plans as if they are talking to a banker. It’s a practice run.
BTW: You have noted the frustration caused by banks moving up their loan levels. What is SBA doing to help get capital to very small businesses?
AMM: We’ve been doing everything we can on the small loan side. One of the things we did a year ago — and we saw increases of about 23 percent year over year — is we decreased fees on loans of under $150,000 basically to zero for the borrower and the lender.
In July of this year, we introduced a business credit score that utilizes [the business owner’s] personal credit score, but it is heavier on the business credit score side for loans under $350,000. As I noted before, I think the biggest reasons small loans aren’t being made at banks these days, or that they’re making fewer loans, is because of the costs, so this reduces the costs. It takes away the former [SBA] requirement that lenders must calculate a Debt-Service Coverage Ratio [DSCR, the ratio of cash available for debt servicing to interest, principal, and lease payments], which is the number-crunching that is so time-consuming for banks. We’ve been testing this credit score for several years, and trust it will be useful for small loans — everything under $350,000.
We have another loan program called Community Advantage, and we work through nonprofit lenders, Certified Development Companies, and Community Development Financial Institutions. They are required to make 60 percent of their loans in underserved areas. They also provide help and technical expertise, so one of the things that borrowers can do when they talk to the office of the SBA or if they’re looking for loans is to look for a Community Advantage Lender.
Our dynamic Administrator at the SBA, Maria Contreras-Sweet, a former banker herself, knows firsthand the importance of lowering costs for lenders so that small dollar loans will be made. She is challenging us at every turn to be the new SBA: Smart, Bold and Accessible.
BTW: SBA Administrator Contreras-Sweet said she was looking to streamline the loan process. How is SBA doing this?
AMM: In addition to using the credit score instead of the cash flow analysis on smaller loans, “SBA One” is a significant upgrade of our process, which we are planning to implement in January of 2015. The first step is going to be the utilization of electronic signatures. Something that will also come out in the first quarter of next year is an eligibility tool that will walk the lender through an online process similar to Turbo Tax. This will be particularly helpful to our smaller lenders that don’t do very many SBA loans.
The new platform will provide lenders with one place to do everything with a loan: Originate it, service it — and in the event there is a default — request their guarantee from SBA. The whole process is more user-friendly. It’s not here yet, but it’s coming soon.
BTW: So the idea is to save time and costs for the lender so they’re more likely to tackle the smaller loans?
AMM: Yes. Think about when you do your tax return, and compare if you had to look up the tax code, find the necessary and correct forms online, and then follow the tax code instructions for submission, to using Turbo Tax’s streamlined steps that lead you through the maze. The difference in time and energy used in these two approaches is tremendous. SBA has lengthy standard operating procedures, and when a lender wants to do business with us they have to figure out what is acceptable, what forms to use, and where to submit them. For a new lender, it’s a daunting task. SBA One is going to make SBA loan guarantees much more accessible to many more lenders.
BTW: When a bookstore owner is attempting to secure a small business loan, oftentimes negative assumptions about the fiscal viability of independent bookstores arise. What can a bookstore owner do to combat this perception?
AMM: As a banker, I had a couple of bookstore clients. One was particularly interesting because the owners would change up their model in response to sagging sales. They had a core part of their business in the education realm that was strong throughout, but 25 percent of their [ancillary] business kind of came and went and they were always moving to stay in the market with that part of their business. It was fascinating, and for me as their banker, one of the reasons why I had confidence in them is because they knew what was going on, and they showed me they understood the changing preferences of their customers. It’s important that the bookstore owner can convey to the lender that they understand this business.
Also, lenders are using data more these days. It’s important that business owners know their own business and personal credit scores. One of the things in [Getting to Yes!] is working with the businesses so they understand the components in the credit score and how they can improve them. If a potential borrower’s score is low, SBA works with them to get their score up so they qualify for reasonably priced loans.