Killing frost hits Minnesota credit markets

A killing frost seems to have blanketed the Eastern seaboard from Wall Street to Washington and it has frozen the credit markets here in Minnesota as well. Even before Washington’s inaction on Monday crashed the securities market, economic development specialists across Minnesota were complaining that loans for new startup businesses and orderly short-term borrowing by existing small businesses for cash flow management had all but stopped.

“Wall Street has come to ‘Main Street’,” is the way Christine Pigsley put it. She’s associate dean of Dakota County Technical College and director of the Small Business Development Center at the college’s Apple Valley site.

This is a problem stretching from the suburbs of the Twin Cities to rural communities, said Bill Coleman of Community Technology Advisors Corp., Mahtomedi. He learned of two central Minnesota business development projects this past week that are being held up because banks can’t write loans in the current financial environment.

“Well-development plans are being turned away, either because banks are under pressure or because they are just being more cautious,” Coleman said.

Economic development consultant Christy James of Christy James & Associates in St. Paul said past economic downturns and weakened job markets actually prompted some people to become entrepreneurs. That isn’t happening now, she said.

Access to startup loans is a factor, and individuals may also be hesitant to jump into the economy with a new business at this time, James said. “It would take some confidence to do so, and there isn’t a lot of that.”

Confidence is a problem all across America. With the economic rescue plans in turmoil this week, talk about credit access and bank lending seems nearly irrelevant. The point here, however, is that Minnesota must live with the economic consequences of national policies and the national economy, and these consequences aren’t likely to turn around quickly no matter what happens to bailout bills in Congress.

Dan Johanneck, executive director of the Crookston Housing and Economic Development Authority in northwestern Minnesota, said his group normally helps two or three business development projects with gap financing each year, filling financing voids between grants and loans. No such projects so far this year, he said.

Crookston does have some housing under construction, a rarity for most Minnesota communities at this time. And that is largely because Crookston is only a half-hour commute to jobs in the Grand Forks-East Grand Forks metropolitan center, he said.

While that is a plus, Crookston nonetheless is feeling pressure of the global economy. Some of its manufacturing is moving across the northern border into Canada, he said.

So-called “angel funds” started by community investors in some nearby towns, such as Fosston, are helping make startup funds available for entrepreneurs, he said. Whether that will leverage commercial lending is an open question, however, because there is so little business development underway, he added.

There can be no question that the current economic environment discourages entrepreneurs, investors and bankers alike. Dakota County’s SBDC director Pigsley sees the current financial crisis affecting small business in several ways.

First, she said, “good, solid proposals aren’t getting past bank loan committees, even though they’ve had favorable initial responses from loan officers.” She currently has 10 such projects with clients who are trying to find bankers. One of those clients has “a good proposal he’s shopping around” that has been turned down by loan committees at three banks.

Second, the Small Business Development Center is losing about five Dakota County small businesses each month because they depend on short-term financing to manage cash flow, Pigsley added. That credit access has also dried up.

Several of the development specialists point to a logical reason for tighter credit policies. In the past, lenders could look at equity in entrepreneurs’ homes as a measure of creditworthiness even when that equity wasn’t pledged as collateral. No assumptions of actual home equity can be made in the current housing market.

Instead, lenders have gone to “asset-based” lending in which property or machinery is used as collateral. “They want something they can repo,” said Pigsley.

This, then, is one of those rare Minnesota 2020 moments when there is no specific call to action at the state level – other than watchfulness.

State officials, policy makers and individual citizens alike will need to fashion responses to the financial crisis the months ahead when the immediate financial market mess plays out on national and international stages. We cannot forecast when something like a spring thaw will come to the frozen capital markets and bring community development back to life.