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Loans to small businesses are on the rise

Martin Foil's company sells yarn that winds up in clothes from the Gap, Ralph Lauren and American Apparel, and business is growing. He's buying new machines and hopes to hire as many as 200 workers this year.

When he decided to expand into a shuttered yarn factory in North Carolina, he borrowed $11 million recently from Wells Fargo to buy it.

"It was a Hanes factory that was closed for a couple of years and had some good equipment — we knew we could crank up that place," said Foil, who also used the loan to buy equipment and a factory in South Carolina.

Now that demand is up and business is finally improving for many companies, they're doing what they always do at the start of an expansion — calling the bank and asking for a loan.

And in a stark contrast to the depths of the financial crisis, the banks are saying yes.

In the last three months of 2010, U.S. Bancorp wrote $8 billion in new business loans, the most in two years. JPMorgan Chase added 400 mid-sized companies as clients. And bank loans overall grew for the first time in two years, according to the Federal Reserve.

"Companies are talking about growth in ways they haven't for three years," says Perry Pelos, head of Wells Fargo's commercial banking.

Loans are one of the best gauges of economic growth. Small and mid-sized businesses that form the backbone of the economy take them out to pay for business needs — unlike big corporations, which go to the bond markets for low-cost debt.

Borrowing by smaller companies is being watched especially closely because it may indicate those companies are preparing to hire. So far, the economic recovery hasn't been accompanied by job growth. Those companies took a pummeling during the recession. Bankruptcies skyrocketed and led to massive job cuts. Firms employing fewer than nine people accounted for more than half the jobs lost in the first quarter of 2010, just after the recession technically ended, reports the Labor Department.

In another hopeful sign, about 75 percent of the loans taken out in the past three months were to pay for mergers and acquisitions. That shows that companies that can afford it are buying up weaker competitors as they prepare for growth in the months ahead.

"After surviving a brutal recession, companies are starting to look around them for opportunities to get stronger," says Laura Whitley, an executive at Bank of America's global commercial banking business.

U.S. Bancorp CEO Richard Davis says he's watching closely to see how many companies dip into their lines of credit for cash. He said nearly half of the bank's customers, a record, don't use their lines of credit.

The companies first to apply for a line of credit were those that hunkered down the most during the recession because of massive sales declines, but were now suddenly experiencing sales growth.

Plastic container and package makers saw sales increase about 5 percent in 2010 after a 16 percent decline in 2009. They nearly doubled their credit lines, to about 2.8 percent of their assets, says SageWorks, a firm that analyzes financial trends at private companies.

>>FAST FACTS

Positive change

>> TAKING CARE OF BUSINESS: With business improving, many small and mid-sized companies are seeking loans. And in a stark contrast to the depths of the financial crisis, the banks are approving them.

>> WHY IT MATTERS: Loans are one of the best gauges of economic growth. Small and mid-sized businesses that form the backbone of the U.S. economy take them out to pay for business needs — unlike big corporations, which go to the bond markets for low-cost debt.

>> SIGN OF GROWTH? Such borrowing may indicate those smaller companies are preparing to hire. So far, the economic recovery hasn't been accompanied by job growth.

Loans to small businesses are on the rise 02/22/11 [Last modified: Tuesday, February 22, 2011 8:43pm]

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