Bob Grandinetti needed $400,000 — fast.
The owner of Halls Window Center was facing a disagreeable but common reality in small business. Key customers were taking too long to pay bills, and suppliers were getting antsy. This was late 2009, perhaps one of the worst possible times for a small business to need a loan.
“We were shut out by the big banks. They wanted nothing to do with us,” Grandinetti says. “It got pretty dire.”
Ultimately, he spoke with John Shelby, a senior vice president with Five Star Bank in Sacramento, with whom he’d worked previously to obtain a line of credit from the Small Business Administration. In about a month, Grandinetti had his money. The process went so well that he’s working with Shelby and the SBA again to get a loan for a new building. In his words, and in contrast to his outlook a few months ago, the time to borrow money is now. The down economy is making commercial real estate cheaper than it’s been in years, and the national credit crunch has triggered changes in SBA lending policies that effectively make it the only game in town.
In February 2009, Congress approved the American Recovery and Reinvestment Act, which, among other changes, restructured how SBA loans are administered. In a typical scenario, a borrower works with an SBA-approved lender to obtain a loan, which the SBA would then back or guaranty up to 75 percent. If the borrower were to default, the bank could recover up to 75 percent of the loss from the government. Under the new rules, however, the SBA guarantees up to 90 percent of the loan. Better still, the SBA has eliminated the fees historically charged for those loan guarantees.
“The idea was to entice lenders to make loans they might not otherwise,” says Becki Roberts, vice president and SBA business development officer with Exchange Bank in Rosevillle. “That would put more money in the market, with predictable results in terms of encouraging startups, keeping struggling businesses alive (saving jobs) and fostering small-business growth.”
Certainly, as a means of encouraging more lending, the idea worked.
The recovery act put $730 million into the SBA loan program in February 2009, and by December 2009 the money was gone. Congress approved an additional $125 million and extended the fee waivers and guaranty provisions, initially, through February. Subsequent legislation extended those provisions again, through May.
Locally, the numbers are a reflection of the national statistics. The Sacramento district office of the SBA, which serves most of Northern California, had backed 411 loans for a total of $137.7 million through April 2010. That’s a 60 percent increase in the number of loans, and almost double the funds distributed from the same time last year.
SBA loans are also underwritten with markedly liberal underwriting requirements. That’s due in part to the security of a 90 percent SBA guaranty, and in part to the recognition that there’s less collateral out there. Borrowers used to offer the equity in their homes as collateral for these loans. When the housing market deflated, especially in the Central Valley, that asset basically vanished. Now, to hear some talk, you’d think SBA lending had become a free money program.
“You used to hear all these stories about the SBA wanting your first born and that sort of thing,” Grandinetti says,” but they gave me a loan for $400,000 with nothing backing it up but my good name.”
Hearing that, it’s fair for anyone with a half-decent memory to start having an uncomfortable feeling of déjÃ vu. Less-than-disciplined loan practices played a huge role in creating the mess the financial industry is still trying to crawl out of. That makes it hard to accept the idea of a loan program, this time funded entirely by taxpayers, which looks like a whole lot more of the same. Factor in a common bank practice of selling these loans to a secondary market and the unease doubles.
Experts acknowledge the issue is somewhat sticky. In February 2009, just as the recovery act changes were voted in, the SBA loan default rate was already at 11.9 percent, according to the Coleman Report, which tracks SBA news. Now, a year later, that rate has soared to 17.1 percent. By comparison, home loan delinquency rates hit 13.3 percent by February 2010, according to Florida-based Lender Process Services. Credit card default rates for Bank of America and Citicorp, two of the nation’s largest consumer credit issuers, were 14.5 and 12.1 percent, respectively.
Every year since 2004 the SBA loan failure rate steadily increased. The ARRA changes won’t do anything to change that. They will just transfer the losses from banks to the government — or U.S. taxpayers.
There is some measure of reassurance. While SBA loans aren’t based entirely on collateral, it is accurate to say they are heavily balanced on evidence of the borrower’s ability to repay the loan.
“Loans are available, but it is not a giveaway program.”
Steve McCurley, vice president and SBA manager, First Northern Bank
“Loans are available, but it is not a giveaway program,” says Steve McCurley, vice president and SBA manager with First Northern Bank in Roseville. “Lenders look at an application very critically to determine the borrower’s ability to pay back the loan, based on historical profits and trends, or on reasonable projections that the business will be profitable.”
That could certainly explain Grandinetti’s approval. There was already a history of successful SBA financing, a solid business plan and customers committed to buy the company’s product.
Whether or not changes in SBA lending create the potential for a new batch of problems, the influx of new money is encouraging to entrepreneurs. For some the fresh money has a lifeline, for others it has been a doorway to a dream.
Bruce and Wendi Davison had talked for more than a decade of leaving the corporate world and opening their own bed and breakfast. They planned ahead, knew they wanted to buy property in a down market and wanted to take ownership just ahead of the busy season. With the incentives for SBA lending, the stars were clearly aligning, and the couple pulled the trigger.
“We didn’t even bother trying with the traditional banks,” Bruce Davison says. “We have lending backgrounds, and between what we knew and conversations we had with others in the industry, it was clear the SBA was going to be the best route, if not the only one.”
Together, the couple fell in love with the Black Bear Inn in Arnold, California, in December 2009. They closed escrow April 15, and business is thriving.
The most recent extension of the SBA guarantees and fee waivers was set to expire May 31. President Obama is pushing for an extension until September 2010 as part of the Jobs for Main Street Act. The plan also calls for substantial increases to the maximum loan amounts. As of press time, there was no solid prediction as to whether that extension would be approved.
SBA has several loan programs available, but the two most common are known as 7(a) and 504.
A 7(a) loan can be made by the bank without having to go to the SBA for full approval, meaning it can be a much faster and easier process. These loans can run up to $2 million and can be used for almost anything, from a new coffeemaker to real estate.
The SBA 504 loan is set up for a small-business owner to buy larger fixed assets, often thought of as anything with a life expectancy of 10 or more years. This could include land, buildings, tenant improvements or a forklift, to name a few. These loans are typically structured on a two-lien arrangement, with the bank holding the first lien for 50 percent of the loan and SBA holding a second lien for 40 percent. The borrower provides a 10 percent down payment. The 90 percent financed amount is provided at a low fixed rate, 5.52 percent for 20 years as of early May 2010.
SBA also offers micro-loans of up to $35,000, Disaster Recovery Loans, and created the America’s Recovery Capital Loan Program to provide loans of up to $35,000 for short-term relief to businesses trying to ride out the economy and return to profitability.
Be advised, however, that simply being a small-business owner does not make anyone automatically eligible for one of these loans. There are limits on the number of employees, annual revenues and net income, for example, depending on the type of business, as well as other requirements.
“SBA has a 5-inch-thick binder on eligibility,” Shelby says. “To summarize it, you have to be a for-profit company, the business owners have to be up to date on their federal taxes and without criminal records, basically someone in good standing. SBA is also looking for skills. They generally stay away from the proverbial displaced banker who, with no experience, wants to open up a Jamba Juice franchise.”
Other key advice from the experts: have a solid business plan. The nation, California and in particular the Central Valley are still in an economy marked by high unemployment and reduced consumer spending. Lenders want to see a plan that shows the business can turn a profit against this backdrop.
Next, as pedantic as it sounds, fill out all the paperwork completely and accurately. Consider the loan papers a resume for you and your business. “Being thorough and complete in a loan application gives a borrower a little more credibility in the eyes of the loan officer,” McCurley says.
And having an actual relationship with your banker never hurts. “I can’t say enough about the community bank and Five Star in particular,” Grandinetti says. “They looked at much more than our balance sheets. They met our employees, toured our facility and they took the time to listen to us. There was a point we were seriously thinking about bankruptcy, and I can honestly say Five Star Bank and the SBA loan we got from them helped save our business.”
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