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by Judy Temes of Craines New York Business
John Arlotta Inc. has designed and sold high-end menswear to stores like Neiman-Marcus since 1985. Despite the recession and the spate of retail bankruptcies, the New York company has been growing steadily.
Two years ago, however, the bank that helped the $4 million company get on its feet pulled the rug out from under it. John Arlotta’s $50,000 working capital line was suddenly terminated, although it had not a single missed payment, credit blemish or even a bad year.
The company’s experience is not at all unfamiliar to small and mid-sized businesses. The credit crunch of the last few years has sharply cut the working capital on which smaller businesses depend to meet expenses such as payroll, rent and utilities, and to survive from one cycle to the next.
Even now, with commercial banks actively wooing smaller companies (see related story, Page 23), the standards for obtaining a working capital line or short-term loan are so strict, only solid-gold companies need apply. Banks are asking business owners to put up more of their own capital and will lend less against that capital.
Turned away by Republic
Manhattan-based Holden Associates Inc. has grown by supplying banks with temporary back-office and systems professionals. But two years ago, when the firm went to Republic National Bank for an extension on its six-figure credit line, the answer was no. “They said we were maxed out based on the ratios,” says Barry Hawks, one of three principals.
It didn’t matter that the then $2 million company needed the extra working capital to service new customers, says Mr. Hawks. Neither did its credit record nor the fact that its clients were banks.|
Based on its formulas, Republic would extend to Holden only what the company’s owners had invested themselves. Three other banks concurred that Holden could borrow no more.
Bankers say the standards for working capital have not changed, and that the drop in loans has been a result of slack demand. With the recovery gaining momentum, “you see companies doing better, which makes it easier to lend,” says Morey Danon, an executive vice president at National Westminster Bank USA in New York.
Still, even with interest rates at their lowest in 20 years, NatWest finds itself having to give away laptop computers to attract customers for fixed-rate loans of $2 million or more. The promotion is one of the steps banks are taking to win back the many customers that in the last few years have defected to finance companies, factors and other asset-based lenders.
Alternative finance companies in Manhattan such as Access Capital Inc. continue to grow despite charging significantly higher interest. Century Business Credit Corp. increased its volume 18% in 1992 to $1.2 billion. CIT Group/Credit Finance has seen its volume grow 10% a year in recent years.
These alternative sources of working capital can often be significantly more costly than bank financing. Banks charge 1% to 2% above prime, but finance companies charge 2.5% and more.
Terms, however, are much less stringent. There are no personal guarantees and no predetermined ratios spelling out what a company can borrow based on its equity or history. These financiers look not so much to the company’s record, which may be spotty due to the recession, but to the credit-worthiness of its accounts receivable.
A company can sell up to $5 million in receivables, 80% of which it can receive a few days after the goods are ready for sale. The balance is sent to the company when the invoice is paid. Access takes 2% to 5% of the value of the receivables as its fee, depending on the quality of the company’s customers and the length of time they take to pay.
This is expensive credit and many firms use Access only for bridge capital. But for companies like Holden the extra cost is outweighed by the extra profit generated from a company that’s doubled its size in two years.
“This has enabled me to hire the people to build the sales,” says Mr. Hawks. “It’s not a long-term solution for working capital, but without it, we could still be stuck doing $2 million a year.”

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