On credit, CIT and small businesses

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CHARLOTTE  N.C.  ( Nov. 3, 2009 ) News of CIT Group's Chapter 11 bankruptcy filing has stirred up concerns among small-business owners who rely on the century-old company for financing.

The worries mirror those felt across the country as credit markets froze, the recession deepened and the people who owned businesses or dreamed of starting one wondered if they could get loans. Now, with economists declaring the recession over, financing might come easier, said Lee Cornelison, director of the N.C. district of the Small Business Administration, an independent government agency that helps small businesses start and grow.

Cornelison spoke with the Observer on Monday about the concerns of running a company in a down economy, the CIT bankruptcy filing and why small businesses will be crucial to the recovery. Questions and answers have been edited for brevity and clarity:

Q. How have small businesses fared, in terms of financing, in the recession? Has the recovery begun?

It's been tough since the credit crisis hit about a year ago. But in September, SBA's loan volume was the highest it's been since March 2008. It appears things are headed in the right direction. That's the good news.

The bad news is, there's still a lot of uncertainty in the market. Lenders are still very cautious. Small businesses need to be extremely well prepared today. They need to demonstrate to the lender how carefully they've planned. They need to have some realistic forecasts, and the forecasts need to show the ability to repay the loan. That's always been true, but they have to be more convincing now.

Q. Where do entrepreneurs typically get the money to start their businesses?

Small businesses are sometimes started out of pocket. In the last few years, a lot of people financed with home-equity loans, and that market is just gone now.

Some turn to friends and family members. Now, as long as they have a reasonable investment to put into it, it's possible to still get a loan from a lender. The starting point for a small-business owner is at a bank.

Q. What types of businesses are most attractive to lenders these days?

The ones that look unattractive are those that depend on the segments of the economy with the biggest problems. Home construction is one. Lenders are also very skeptical of restaurants.

I think the ones they prefer somehow have the ability to plug into the infrastructure improvements coming out of the recession. Also, if you're providing a product or service that people need: Auto-repair and home-repair businesses will probably do well. People are going to be repairing what they have instead of buying new.

If your business provides those discretionary things people can cut when they're trying to save money, it's probably not a good business to be in. In good times, any business can fly. But in bad times, you'd better be back to the basics.

Q. Has the credit crisis scared people away from starting businesses?

There are conflicting forces at work. On one hand, there may be a lot of people who are not quite ready to start a business, but on the other hand, there are a lot of people who have lost their jobs.

Sometimes, if you lose your job, all of a sudden you say, "Maybe it's time to do this." For some, the economy is saying "don't," and for the others, it's forcing people to make a living.

Q. What do small-business owners need to know about the CIT bankruptcy filing?

If you have an existing loan, there shouldn't be any problems. I would think CIT would want to hang onto those customers, continue servicing those loans.

Even if CIT doesn't, somebody will be willing to come in and buy those loans. I would think their customers won't see any impact.

Q. What kinds of businesses will survive long term?

The key is, know your product, know your market, know your customer and know your competition. And know the current economic condition. People just have to be very careful. They need to put time and effort into the planning.

Q. When will the credit markets return to normal?

Never, I hope. I don't know how you define normal. I think we will see steady improvement. I think it's going to take a while to get things back, but I hope we don't get back to the effects of a bubble.

© The Charlotte Observer, N.C.; distributed by McClatchy-Tribune Information Services, 2009