Barbara Wright had to downsize her uniform store to save rent money. Wright moved across the street to a smaller location with a less than desirable view and less storage space.
José Moré/Chicago News Cooperative
When Barbara Wright learned last year of a federal program to aid struggling small businesses like her South Side uniform company, she jumped at the chance to apply for the Small Business Administration loan.
“I thought I could use the loan to help my cash flow,” the soft-spoken Ms. Wright said as she pointed toward racks of uniforms at The Wright Fit, her store at 1805 West 95th Street. “You know you have to pay for this, and when your customers are taking 30 to 120 days to pay their invoices, things can get tight.”
So she went to her bank, ShoreBank, which helped prepare the paperwork, and she sent in her application. It was approved, and Ms. Wright borrowed $35,000, the maximum allowed under a special Obama administration 2009 economic stimulus program for small businesses.
She thought she could use the money to meet her cash needs, but she soon learned that the loan had a catch: It could not be used for operations. In fact, the money could be used only to help pay off a previous loan of $50,000 from ShoreBank.
Federal officials and Congress structured the loan program to help banks as much as to help their customers. The loan to Ms. Wright provided enough money for her to meet her loan payments, but not enough for her to avoid making further cutbacks to her business.
“Things are still tight here,” she said. “The loan really helped the bank, but what about me?”
Ms. Wright is one of many Chicagoans who own struggling small businesses, the kind of companies that create most new jobs around the country. She is among the entrepreneurs that economists and President Obama hope will resume hiring and rescue the economy from the worst economic downturn since the Great Depression.
In fact, Ms. Wright is one of the lucky ones. Thanks to a federal guarantee that her lender will be repaid, she borrowed the $35,000 and appreciated the help. Thousands of other small-business owners say banks will not lend them money at any price — particularly in troubled industries like home building, where credit is crucial and jobs are particularly important to the South Side and other black neighborhoods.
“Getting a loan in this area has been hard for quite a while, and getting a construction loan is nearly impossible,” said William Wolk, president of Team 4, a contractor and real estate development consultant who often works on the South Side.
But Ms. Wright’s mixed fortune at ShoreBank also suggests why the government’s current efforts to prime the pump are sputtering despite record low interest rates and federal spending financed by huge budget deficits.
While multibillion-dollar loan programs may sound like a boon to the economy, Ms. Wright’s experience shows they have been structured so they help the people who do the hiring as much as the ones who make the loans.
Ms. Wright has been in business for 14 years, employing a small staff and supplying uniforms to schools, businesses and institutions. For most of those years, business was good.
Things started to change in 2008 as it became clear that the nation’s banks had gone on a credit binge that seeded many bank portfolios with toxic loans. As bankers and economists tried to figure out the severity of the problem, many banks slashed credit.
Business conditions deteriorated as credit tightened, unemployment soared and many consumers were unable to keep up with their mortgages. A wave of foreclosures on the South Side showed that blacks in particular were struggling, and small businesses based in mostly black areas have tended to suffer along with them.
Mr. Wolk said subprime loans, those with more onerous terms, and Alt A mortgages, ones with more flexible borrowing conditions, accounted for nearly half the home loans in some South Side neighborhoods. As troubles with those mortgages mounted, layoffs in the construction and manufacturing industries hit black neighborhoods particularly hard.
An economic-hardship report by the Metro Chicago Information Center shows that unemployment rates in predominately black South Side neighborhoods like Englewood, Chatham, Auburn, Gresham and South Shore are now two to three times higher than the average in other areas of the city. Some government reports estimate that the unemployment rate now stands at 20 percent to 25 percent in parts of the South Side.
Like many other businesses surrounded by neighborhoods of foreclosed homes, unemployed workers and shuttered storefronts, The Wright Fit felt the economic pain. Ms. Wright said she cut back to only part-time employees about a year ago and started trimming expenses.
“My big customers started bundling,” she said, a practice in which companies consolidate their purchase orders and tap one uniform company in hopes of winning a better price with a large order.
“I started partnering with others to keep part of that business,” she said. But her customers started taking longer to pay her. Last summer she read about the loan program on the Small Business Administration’s Web site.
Ms. Wright contacted ShoreBank, which has a national reputation for operating profitably in low-income neighborhoods, and bank officials helped her apply with the S.B.A., which was one of the few programs the bank could turn to for aid.
At the time, federal and state bank regulators, worried about the struggles confronting ShoreBank’s customers, told the bank to improve its financial footing by trimming its loan portfolio and bolstering its capital. Both steps require ShoreBank to curtail lending. Under the American Recovery Capital Loan Program, the S.B.A. guaranteed that the bank’s loan to Ms. Wright would be repaid.
Ms. Wright said she was disappointed that her $35,000 loan could not be used to help boost her working capital and ease the pressure from her store’s day-to-day needs. But using it to repay her ShoreBank loan did help her reduce costs.
“Look,” she said, “it’s $1,000 a month that I no longer have to worry about.”
Brian Berg, ShoreBank’s vice president for marketing, said the American Recovery Capital program required that the proceeds of Ms. Wright’s loan be used to pay the principal or interest on existing bank loans.
The recovery capital program is only one of numerous S.B.A. loan programs, but the agency promoted it as one that would help small businesses weather the downturn and ease cash problems.
David Schroeder, vice president of federal relations at the Community Bankers Association of Illinois did not know the specifics of Ms. Wright’s case, but said it illustrated a broader problem that Congress needed to consider as its took up the far larger $30 billion small-business program that Mr. Obama proposed in his recent State of the Union message to help create jobs.
“You have the Congress and the administration saying, Lend, lend, lend, and you have the regulators saying, Tighten your underwriting and strengthen your capital,” Mr. Schroeder said.
The latter two steps tend to discourage lending.
As for Ms. Wright, in early February she moved her store across the street to a space that is half the size of her former location.
“I cut my rent and utilities in half,” she said as she searched her new space for room to store her inventory. Her work force is down to her, her sister and a couple of part-time employees, but she said the economic situation was still tough.
“People are just scared to spend money,” she said. “Many come in here, and it’s like a bargain basement. They want a low price.”
She said her customers were worried that they would lose their jobs.
You must get creative, Ms. Wright said, and she is building her Web site to see whether she can use it to market her uniforms more effectively.
She will survive, she said, adding, “I don’t have any other choice.”
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Thanks for sharing this story! Ms Wright made the right decisions and downsized to a smaller location, helping her save on costs. Plus building a website will help market her business more effectively and bring in orders from other locations. Great post!
hah… only in small business