Aug. 14--Carolyn Watson recently found herself in a common situation for small-business owners: She knew from customer feedback that she should expand, but she also knew it would be difficult to convince a bank to give her a loan to do so.

Watson owns Core Kinetics Pilates in Bellingham, which offers a variety of exercise and dance classes, including Pilates, yoga and martial arts. Her Bellingham studio was doing well, but she was drawing a significant number of clients from the Birch Bay and Anacortes areas. With rising fuel costs, she wanted to open small studios in those areas. She was able to get a bank loan to open a studio in Anacortes and decided to wait on Birch Bay, but then found an ideal spot for her third studio at 4819 Alderson Road.

Having just opened a new location and not having much collateral, Watson knew she couldn't get another loan from a bank, even though it was under $20,000. She turned to On Deck Capital, a company that services loans to small businesses who get denied by banks and was able to get the Birch Bay location open in May, less than six months after opening the Anacortes studio.

"It worked out well," Watson said. "They (On Deck Capital) have higher interest rates, but a shorter payoff period. It turned out to be a good move, because both studios are already turning a profit," she said.

Although Watson had to find an alternative source for lending, she knew from past experience that probably would have been the case even a few years ago, when the national economy was booming. Many local commercial bankers appear eager to finance commercial projects, but with a couple of caveats: They are taking a closer look at the numbers and are avoiding many residential projects.

"I'm looking harder at things like the carrying capacity of a borrower, because the overall economy has slowed to a point where it's important to know what would happen if some of the customers stopped coming," said Terry Daughters, a commercial banker at Peoples Bank.

While local commercial lenders are looking at loans with more scrutiny, they are also mindful of the increased competition locally. Between June 2006 and June 2007, there where five new bank branches built in this area, bringing Whatcom County's total to 76 branches with $2.9 billion in local deposits, according to the FDIC. In comparison, Yakima County, which has about 50,000 more people, has 55 bank offices. Since June 2007, Columbia Bank has entered the market, bringing the total number of banks in Whatcom County to 16.

"The marketplace for commercial lending is as competitive as ever," said Bruce Clawson, a senior vice president at Banner Bank. "Not only do you have more banks, but increased competition from credit unions and other lending sources."

Even if there are more of them around, capturing the interest of a commercial lender still takes some work from the business owner.

Bankers are not only trying to figure out if the business is a safe bet when deciding to make a loan, but they are looking to see if the companies it is tied to, such as vendors or suppliers, are in good shape. Daughters said commercial bankers get a bit nervous when they see a loan application from a company that has a lot of bills it hasn't collected from other businesses. This is particularly true in the current economic climate, with business bankruptcies on the rise nationally.

"It is very important for a company to have its account receivables in order before applying for a loan," Daughters said. "The further out someone is on paying their bill, the harder it is to collect. This is a good time to be aggressive on that front; it's important to be liquid (have cash flow) when the economy is slower."

Clawson said it's also important to know what lending policies are beforehand and try to meet them before presenting a loan application.

"Don't bother asking for exceptions, because that's not going to happen," Clawson said.

For banks these days, balancing commercial portfolios by lending in segments of the economy that are doing well is important, Daughters said. That's why developers won't see many loan approvals for residential projects, particularly ones big ones, such as condominium towers or large residential housing developments.

"Banks are looking at their portfolios and seeing that residential units aren't selling right now. The banks got the message and started looking in other areas," Daughters said.

While residential projects are getting the cold shoulder, other commercial projects are looking good, Clawson said.

"We're not seeing the troubled credit issues locally that you hear about nationally and we're seeing a lot of loan requests for commercial projects," Clawson said. "This is period where business owners should be making decisions based on their specific situation, because there are parts of the economy that are strong right now."

Looking at her specific situation is what Watson did, and although opening a third location right after a second one didn't fit in many banks' loan criteria, she felt confident she was making the right move by looking closely at her books to determine what was happening in terms of sales.

"It's good to know whether your business is in a cyclical trend or is being impacted by a recession," Watson said. "For example, June is always a slow month for us, so I took that into account when making this decision."

While her business had been experiencing overall growth, she also knew that her clients are being impacted by the economic slowdown, though, noticing more were taking classes and less were getting private lessons to save money. That's why she felt it was important to adjust by opening a couple of smaller studios.

"I've believed it's easier to adapt to the clientele you have rather than going out and getting new clients," Watson said. "Many of our clients were making changes to adapt to the economy, and one of those changes was to drive less. They are great customers, and I didn't want to lose them."

Reach Dave Gallagher at 715-2269 or dave.gallagher@bellinghamherald.com.

Reach DAVE GALLAGHER atdave.gallagher@bellinghamherald.com or call 715-2269.

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