CHICAGO Like many small business owners, Marianne Cusano uses her home to fund her business.
"We have a lot of debt," said Cusano, 53, the co-owner of New England Barricade Company, a maker of roads signs in Newmarket, New Hampshire. "Right now I'm in the process of trying to refinance my house so I can pay off all my credit cards."
New England Barricade is by no means a failure. Since purchasing the company in 2002, Cusano, who runs the business with her husband, Allen, has boosted sales more than 35 percent to some $750,000. To get through rough periods in the seasonal business, they used government-backed loans; now they face a stricter lending environment for credit.
"A lot of our credit cards have been reduced," said Cusano, who has five employees on her payroll. "We used it to help our cash flow winter after winter."
The hunt for financing is a constant challenge facing small companies. Even as overall economic sentiment appears to be improving, the jury is still out on when small companies will see easing in the credit they require to hire and expand.
Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University, said fallout in the real estate market is the major culprit for the slowdown in lending to small businesses, as many depend on home equity for collateral.
"You're not going to solve the small business credit problems if you don't solve the housing market problem because they're linked," said Shane, noting more than 20 percent of small business owners use home equity in some way to help finance their companies. "Either you have to offset that or somehow accept a big contraction in the small business credit market."
According to the Small Business Administration (SBA), total loans of less than $1 million fell 10 percent to $624.3 billion at the end of 2010, down from $695.2 billion in June 2009. The information was pulled from banking call reports to the Federal Deposit Insurance Corporation.
One of the reasons for the dropoff in SBA lending was the end of recessionary stimulus programs. Despite the decline, the SBA maintains banks are easing their lending terms and pointed to a slight uptick in micro business loans in the final quarter of last year.
"It's possible that 2011 might be a better year for small business lending," said Victoria Williams, an economist with the SBA's Office of Advocacy, which studies broader trends.
Reduced demand is also a factor in the stagnation, as small businesses have hunkered down amid slower growth. According to email-marketing firm Constant Contact, which recently polled 1,500 small business owners, 77 percent said they did not seek additional funding in the past 12 months, while another 10 percent tried and failed.
The inertia has prompted new measures on the part of lenders.
Since being hired six months ago, Steven Smits, associate administrator for the SBA's office of capital access, has been traveling the country to meet with bankers. He's seeking ways to simplify what historically has been viewed as the onerous process of securing SBA government-backed loans.
"I think we're moving in the right direction," said Smits, whose organization is also putting more attention on the needs of underserved communities. "The challenge is that there's a tail to the recession."
In the past month, the SBA averaged 1,260 loans totaling $390 million per week, up from January levels of 1,000 weekly loans of almost $200 million.
Banks, too, have been allocating more resources to jumpstart small business lending. JP Morgan Chase & Co (JPM.N) said late last month it would lend $12 billion to small businesses in 2011, up 20 percent from last year. Beginning in 2010, it has added nearly 500 bankers dedicated to small business through the first quarter.
"The success rate going forward for a lot of small businesses should be much better for the next three years than the last three years," said Richard Quigley, president of Ink From Chase, the bank's small business credit card arm. "We really want to try to do everything we can to give small business owners the capital they need."
"WILD WEST" FOR FUNDING
Still, those in the business of navigating small business credit said a more conservative regulatory climate following the recession has made qualifying much harder. That, coupled with shrinking values of collateral in homes and commercial facilities, often results in a no-win situation.
"The banks are cherry picking their loans," said Ami Kassar, founder of Philadelphia-based MultiFunding LLC, which researches financing for small businesses and subsequently brokers loans on their behalf.
"If you don't have collateral, there are loans available to you. You're moving into the world of high interest rates," he said, citing expensive options such as merchant cash advances and factoring. "It's almost like the Wild West."
That's small comfort to Stewart Sonneland, founder of Spokane, Washington-based Strategic Hardware, a four-year-old startup that offers data storage solutions.
The firm, which has seen annualized growth of more than 200 percent in the past three years, has been unable to get bank financing to help pay for new hires. Instead, Sonneland, 53, is turning to the angel investor community, prepared to give up equity in his firm.
"It's been amazingly frustrating," he said. "I've just got to figure out a different way to do it."