By ANJALI CORDEIRO
When Amy Loera was looking for a loan to expand her family's Mexican-restaurant business earlier this year, she applied at nine different banks. They all turned her down.
Many of the banks accepted her initial application but simply didn't take things any further, she says. Some raised concerns about the nationwide downturn in the restaurant industry in refusing her request. And some told her that if she had applied a year ago, she would have had no problem.
So Ms. Loera turned to a local lender, Arrowhead Credit Union in San Bernardino, Calif., after a business acquaintance told her the credit union had given loans to other businesses in the community. She was approved for a $643,000 loan this summer.
Ms. Loera, who runs the restaurant chain, Tio's Mexican, with her husband and brother-in-law, believes that since Arrowhead was based in the region, it was easier for her to make a stronger case about the health of her business.
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"They were local," she says. So "they were able to see that because we are a family-owned restaurant and because we had a very good formula to keep our overhead [costs] low and prices reasonable, we are picking up the slack from [fancier restaurants] around us and are not feeling a big hit from the current economic situation."
Small businesses have been having increasing trouble getting loans as the credit markets have seized up. But some, such as Tio's Mexican, are finding that smaller community banks and credit unions are more open to offering financing. For one thing, many smaller lenders are in relatively strong financial shape because they didn't make the types of investments that got many of their larger brethren in trouble.
In addition, private local lenders may be more familiar with a region's business climate, so they are better able to look beyond national trends to base their decisions on the more immediate factors affecting an individual business.
"Often times," says Sandy Baruah, acting administrator of the Small Business Administration, "the larger institutions will rely more heavily on the credit score, whereas sometimes community banks will take a much closer look at the business plan. And especially if they are based in the region or the community, they will make a decision based on their overall comfort with the business plan and presentation."
" But still, credit ratings matter," Mr. Baruah says.
All About Cash Flow
When applying for loans, Ms. Loera says she highlighted the fact that her restaurants are based in so-called bedroom communities like Rancho Cucamonga, Calif. -- where people commute some distance to work, are strapped for time, and look for a place where they can eat an affordable family meal at the end of the day.
She presented a three-inch-thick binder filled with financial statements showing the historical results of the company's existing restaurants as well as the fact that they were debt-free. The Loeras had credit ratings in the 750 range, she says.
She also gave a projection of how much money the new restaurant would bring in over the first 12 months, and a business plan that included details such as the number of employees the new location would have and the intended menu.
Ms. Loera says all that data didn't affect the decision of the banks -- but it did Arrowhead's.
Jon Parks, a vice president at Arrowhead, says the credit union approved Ms. Loera's application because the family showed they already had experience managing restaurants and were able to prove that their existing locations were financially successful.
The fact that the new eating place is being planned as an affordable family restaurant makes it more likely to succeed in the current economic environment, he says.
'Behind the Scenes'
"We are not score-driven in the business-lending side, and choose to look behind the scenes," Mr. Parks says.
He says a strong credit score -- one above 700 -- can be helpful. But the one metric that often trumps all others is cash flow. Since it indicates the amount of cash generated and used by a business over a certain time frame, it can be a key indicator of a borrower's ability to pay back the loan.
Lenders also try to gauge how a small business will do going forward. Heath Chapman, vice president, commercial banking at Morrill & Janes Bank in Merriam, Kan., which is still lending to small businesses, says companies increase their chances of getting a loan if they give financial forecasts that look realistic.
He suggests that owners include a best- and worst-case scenario for their revenue projects and for forecasts on how they will repay the loan.
For a banker, "having all those questions already answered helps," he says.
Case by Case
Certain industries that have been particularly hard hit by the weakening economy may face added pressure to prove that their earnings are strong enough to withstand the downturn. But institutions that are still lending to small businesses tend to take each application on a case by case basis.
"Those industries that have been hit the worst -- construction, auto dealerships -- we are going to look at with a logical eye and understand what we are up against the next 12 to 18 months," in terms of the outlook for the overall industry, says Mr. Parks.
"It doesn't mean we are not going to lend to them if the numbers dictate and everything makes sense," Mr. Parks says.
He believes there could be pockets or individual businesses that continue to do well even within such sectors because they have some kind of a niche offering.
Some community lenders aren't completely dismissing even those businesses that face some financial hiccups. Mr. Chapman says he is asking small-business clients to come to him as soon as possible with financial problems or difficulty funding losses.
He says he is willing to consider lending to small businesses that face some difficulties if they have a history of overcoming problems in the past.
Write to Anjali Cordeiro at anjali.cordeiro@dowjones.com
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