Small business turning to alternative financing when big banks turn them down

In the glory days of the digital photo frame business, when his products were still a novelty and shoppers were flush with cash, getting a bank loan to manufacture them was a cinch, Michael Levy says.  We would say: ‘We got a $1 million order from the Sharper Image. We need financing. With a snap of the fingers, the guy drove down to my office, we’d sign a document, he’d give us the money,” Mr. Levy recalls, sitting in the Deer Park, Long Island, office of the Media Street Group that he runs with his brother, Norm.


But like many other business owners, Mr. Levy saw his prospects change drastically in 2008 as the financial crisis unfolded. The Sharper Image and several other top customers filed for bankruptcy, and Mr. Levy found himself scrambling to keep the business afloat.

His longtime bank wanted nothing to do with his company, Mr. Levy says, and several other banks spurned his loan requests, too. After a year of hand-wringing, he found an unconventional lender that was still making loans — lots of them.

It’s called Hartsko Financial Services, and it provides short-term credit to small and midsize companies that sell everything from olive oil to women’s sandals. In the last year or so, companies have been beating a path to Hartsko, and to other businesses like it — even if the loans are vastly more expensive than traditional ones from banks.

Richard Eitelberg, Hartsko’s founder and president, said his company previously fielded many loan requests from companies on the financial brink. Now, he says, Hartsko can also pick from companies with solid financials that simply can’t get a bank loan. “What we are seeing is better deals than we did in the past,” Mr. Eitelberg says. “We were viable when banks were lending. Now we are overwhelmed.”

Hartsko’s office, which is surrounded by Irish pubs in the Bayside neighborhood of Queens, is a sharp departure from the sterile cubicles and prefabricated offices of most major bank branches. At Hartsko, nine employees vie for space in three modest rooms jammed with computers, printers and fax machines.

The floor below Hartsko was occupied by a massage parlor until about a year ago, when it was closed by the vice squad, Mr. Eitelberg said. An acupuncture clinic took over the space.

Mr. Eitelberg, a burly 47-year-old sports fan who favors untucked dress shirts and open collars, decorates his office with trinkets honoring New York sports teams; a full lineup of the Mets, in miniature, adorns a shelf behind his desk. There’s also a poster of the Three Stooges in golf garb and a framed homage to Tiger Woods, which now prompts the occasional ribald joke from his employees.

Just as the credit squeeze has pushed some consumers to unconventional sources of funding like pawn shops and payday lenders, a constriction in traditional bank lending to businesses has benefited companies like Hartsko.

Small-business owners say banks routinely reject applications for loans that were readily available just two years ago. In addition, many say the limits on their credit cards have been cut as banks seek to limit their risk amid the economic turmoil. To help ease the situation, President Obama, in his State of the Union address on Wednesday, proposed giving $30 billion to community banks to make loans to small business.

Recently, the Treasury Department began tracking lending by the 22 largest bank recipients of federal bailout money, and it found a sizable decrease in small-business lending.

During a seven-month period ended in November, the banks reduced their small-business lending by $12.5 billion, an overall decline of 4.6 percent, the data show. Wells Fargo and Bank of America, the two biggest small-business lenders, cut their lending by 4.4 percent and 6.2 percent, respectively, during that time.

John Durrant, a senior vice president at Bank of America who oversees small-business loans, said that roughly half of the decline in lending to small businesses was attributable to decreased demand. In addition, he said a decline in sales and creditworthiness among small businesses had contributed to the slowdown.

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Bank of America lent $16 billion to small and midsize businesses in 2009 and plans to increase its lending by $5 billion this year, he said.

Banks, of course, are now more reluctant to hand over money to small and midsize companies partly because the practice is riskier than it was just a few years ago, when consumers were spending freely. Banks are writing off record numbers of bad loans and have tightened their underwriting standards to limit their losses.

“After Chase said no, I went to Citibank. I went to Capitol One. I wasn’t going to sit around waiting,” says Mr. Levy, explaining that he needed to borrow $1 million last year for $1.5 million in purchase orders for new products, including frames with Wi-Fi access. “All of them said the same thing: ‘the underwriters, the underwriters.’ They just tightened and, boom, they just shut it off.”

WHEN small businesses face funding squeezes, Mr. Eitelberg and others like him offer an enticing, if expensive, pitch for desperate entrepreneurs.

He peddles what is known as purchase-order financing to companies that sell goods but often manufacture them in factories abroad. It is a relatively new line of business — he estimates it’s about 20 years old — and a twist on the ancient and much larger practice of factoring, in which a business sells an invoice at a discount to get its money faster, providing the factoring company with a hefty fee.

Purchase-order financing, though similar to factoring, is further up the financial food chain. Purchase orders are written guarantees from a buyer that it is committed to purchasing a product. By financing purchase orders, Mr. Eitelberg essentially pays the factory to manufacture the goods. Hartsko also pays to have the finished products shipped from the factory. Once Hartsko is paid for the merchandise, it takes its cut and hands over the rest to its customer.

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