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By Ashley Fletcher Frampton
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CHARLESTON -- Generous incentives for U.S. Small Business Administration loans included in this year’s stimulus act, billed as help for struggling small companies, sound like a slam dunk for banks and businesses alike.
What bank wouldn’t want to make loans with a government guarantee that’s been raised to 90%, for example? Ditto for a new program that helps businesses pay existing debt with small loans backed 100%.
But banks are cautious about making those loans for the very reason the SBA is pushing them — because the businesses could collapse. Even a low risk of loss concerns banks at a time when most can’t afford more losses.
“Banks in general are getting pressure from two sides,” said Barry Stogner, senior vice president and head of small business underwriting at First Citizens bank. “The federal government, through the stimulus program, wants credit to flow, but on the regulatory side there’s a lot of pressure to clean up your balance sheet.”
Loan volume down
The volume of SBA loans made in South Carolina remains low compared to recent years, and some small-business owners are still hitting dead ends when asking banks for help, despite the government’s attempts to sweeten the deals.
Kevin Krawchuk, publisher of The Real Estate Book in Charleston, Hilton Head Island and Savannah, has talked to 14 lenders recently about a small SBA loan after hearing about the new provisions included in the American Recovery and Reinvestment Act.
Most have brushed him off.
Krawchuk is seeking working capital to get to the other side of the recession without cutting his small staff, he said. He doesn’t expect the government to help his business. But when the resources are supposedly out there, Krawchuk is confused about why he can’t take advantage of them.
In May, lenders made 27 SBA-backed loans statewide, up from 24 in April and 25 in March. But that’s still far below the monthly average of 41 loans in 2008 and far below the 62 average in 2007.
In the Charleston region, lenders made nine SBA loans in May, up from three in each of the prior three months. That was the highest number of loans made in a month since March 2008.
SBA-guaranteed loans in Charleston, Dorchester and Berkeley counties:
| Year | Number | Loan Amount | 2007
2008
2009* | 126
77
23 | $28.7 million
$21.1 million
$6.8 million |
The recent drop in SBA lending isn’t limited to South Carolina. When announcing the new lending incentives in March, President Barack Obama said nationwide loan volume was about $20 billion in 2008 but was trending at less than $10 billion this year.
SBA-backed loans are meant for small businesses that can’t get credit on reasonable terms through traditional routes, perhaps because they lack collateral or solid cash flow.
Commercial banks or other lenders make the loans based on their evaluations of borrowers’ credit, and the federal government promises to pay a portion of the loan back if the borrower defaults. The level of the guarantee varies among different types of SBA loans, usually ranging from 50% to 85%.
Behind the slowdown
Federal officials attribute some of the slowdown to frozen secondary markets. In the past, investors have purchased portions of the SBA loans from lenders. Those sales allow the banks to recoup their capital and make more loans.
Without the ability to sell loans, making them would tie up banks’ capital.
The stimulus act also included programs meant to revive the secondary markets for SBA loans. But setting up those programs is more complicated and has taken longer to implement than other provisions of the act, such as eliminating loan fees and raising the guarantee, according to a recent report by the U.S. Government Accountability Office.
Apart from the secondary market, some bankers say the slowdown in SBA lending is a matter of businesses’ diminished creditworthiness. The recession has hurt many small companies, making them less attractive loan candidates.
“We want to lend money; that’s our job,” said Eric Wooten, director of credit administration at First Federal of Charleston. “If we don’t do that, then we’re not successful. But it’s fairly difficult these days to find a creditworthy transaction, because times are tough.”
Wooten said the government’s 90% guarantee might sound good, but a 10% loss is still a loss. And not all SBA loan programs fall under the 90% guarantee.
First Citizens’ Stogner echoed those concerns. The bank is an active SBA lender, he said, and for one type of SBA program, it was the state’s top lender in 2008. But a government guarantee doesn’t make every borrower a good loan candidate.
“SBA does not make a bad loan good,” he said.
“If you have a small business that is struggling, has trouble paying its debt, they’re not going to get approved,” Stogner said.
Devil in the details
June 15 was the start date for a new stimulus loan program that offers 100%-guaranteed loans — up to $35,000 — to established businesses that need short-term help making debt payments.
Borrowers don’t have to make payments on America’s Recovery Capital loans, for a year, and the government pays the interest during that year.
Sounds like a great deal, right? Not necessarily to banks.
For starters, the whole idea of the loan program — making loans to companies that already can’t pay their debts — seems risky. “If a guy’s having trouble making ends meet now, what’s going to happen a year from now?” Wooten said.
As the June 15 start date approached, some banks were waiting on details about how the program will work before deciding whether to participate.
Wooten said a key detail of the program was unclear: The SBA says the loans must be made to “viable” companies, but he isn’t sure how “viable” is defined. If the SBA later determines that a loan made was to a company that was not viable, he isn’t sure the bank would get its guarantee.
The loan program requires lengthy documentation, which Wooten said creates room for other errors that could jeopardize the 100% guarantee.
“On the surface, this looks like a good idea, but the devil’s in the details,” Wooten said.
Stogner said First Citizens is also waiting for more information before deciding whether it will participate in the new ARC loan program.
The Charleston-area Small Business Development Center has been helping banks understand the details of the new ARC loan program, manager Tom Lauria said. He said he is seeing significant interest among banks for participating in the program.
However, there’s one caveat: “It looks like banks are only doing it for existing customers,” he said.
Other factors
Banks and SBA officials say another factor behind the decrease in SBA loans is a lower volume of loan applications generally.
Often businesses don’t seek out an SBA loan specifically. Instead, they ask for a traditional loan, and if the risk level is a bit high, banks will suggest an SBA loan. In this slow economy, fewer businesses are seeking loans.
But Lauria said he has noticed that banks nowadays seem reluctant to consider businesses for SBA loans if they’ve already turned them down for traditional loans.
“We don’t understand why,” Lauria said. “It’s easy to do.”
Some banks are deterred by the paperwork, Lauria said. But electronic filing has made the process easier than it once was, he said, and the local SBA office tries to work with banks to show them that.
State SBA director Elliott Cooper said that, like any specialized program, SBA loans require expertise. For certain loan programs, local officials refer applicants to banks in other states that have found a niche making those loans. In South Carolina, a nonprofit lender in Columbia handles larger-scale loans for many banks.
Because of banks’ increased scrutiny in making loans, Lauria suggested that businesses come to the Small Business Development Center when they first experience financial trouble.
“It’s kind of important at what point the business comes to us,” Lauria said. “When they realize they are in trouble, we can help them. When they are already in trouble, it becomes harder to get money.”
Published June 25, 2009 |
