The number of loans backed by the U.S. Small Business Administration made to local companies plummeted in 2009 for the second straight year, underscoring businesses’ complaints that it’s extremely difficult to get a loan. What’s more, the lack of lending is raising concerns about the prospects of a recovery.
According to data recently released by the SBA, the number of loans made in the L.A. district in fiscal 2009 fell by 53 percent to 1,747. The dollar amount dropped by 34 percent to $674 million.
Those drops are from 2008, which itself saw big drops from the previous fiscal year, which ends in September.
“Everywhere you go, small businesses are complaining they can’t find lending,” said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp. SBA loans, he added, are critical, especially at a time like this because the major banks aren’t lending.”
Indeed, SBA loan volumes at many top lenders, including Bank of America Corp. and JPMorgan Chase & Co., declined sharply from 2008. Capital One Financial Corp., which ranked among the largest lenders in 2008, did not make a single local SBA loan in 2009. Even the top local lender, Wells Fargo & Co., originated 15 percent fewer SBA loans in 2009 than in the previous year. (See The List on page 16.)
Although some community and regional banks are beginning to fill the void, several observers expect the volume to remain low for some time.
“The need for capital is out there,” said Alberto Alvarado, director of the SBA’s local office. “There continues to be a need that is not being met.”
The reasons for the decline in SBA lending are disputed. Some bankers blame the economy, which has shrunk the pool of creditworthy companies. Business owners say banks, which are still on the hook for a portion of nonperforming SBA loans, have tightened their standards. Others point to the secondary market for securitized SBA loans, which ground to a halt for a time.
Whatever the reason, the landscape for small business financing has shifted dramatically.
“It’s a different world now,” said Steven D. Turner, a member of the board of the Black Business Association, an L.A. non-profit supporting African American-owned companies.
The group’s member companies are increasingly complaining of difficulties in obtaining SBA loans, Turner said. “It’s more complicated than it used to be. The underwriting guidelines are more stringent; the background check they do is more thorough. All the i’s have to be dotted and the t’s crossed.”
The changes are having ripple effects across Los Angeles, an economy built on small and middle market companies.
Said Kyser: “It’s going to be a very, very painstakingly slow recovery.”
‘Bank after bank’
The SBA was created to help small businesses receive financing when they might otherwise struggle to obtain a traditional bank loan. Two of the administration’s programs – the 7(a) loan program for entrepreneurs to start and grow their businesses and the 504 fixed-asset financing program for the purchase of land and equipment – account for the bulk of loans originated.
Like many business owners, Drew Boyles had little problem securing an SBA loan as little as two years ago.
So when he decided to seek a $350,000 loan this year to help grow his network of 1-800-GOT-JUNK waste hauling franchises, he was not worried. “I had no blemishes on my business or personal credit,” he said.
Boyles went to the same SBA loan broker he had used previously and applied for a loan. He was turned down by 14 different lenders.
“It was just bank after bank,” he said. “I do collectively $3 million in annual revenue and I couldn’t get a $350,000 loan, which to me is pretty ridiculous.”
Boyles admits that his credit profile may be less than ideal. He has few hard assets and his revenue is down slightly. But his cash flow remains strong, he said, and the business is practically unchanged from a few years ago when he took out a similar sized loan.
“The landscape for risk has completely changed,” he said. “The banks are not wanting to take the risks that they were a year ago.”
Some banks dispute that.
John Durrant, senior vice president of Bank of America’s small business segment, said a broad decline in demand for SBA loans and a drop in creditworthy borrowers are the main reasons that lending has fallen.
“The vast majority of small businesses have experienced a material decrease in their cash flows,” he said.
Two years ago, Bank of America was the largest local SBA lender, originating more than 1,000 loans for a total of about $40 million. In 2009, however, the bank made just 24 SBA loans in Los Angeles for a total of less than $1 million.
Durrant said the bank is reevaluating its participation in the express version of the SBA 7(a) loan program – which features smaller loans and requires less paperwork. Those loans, he admitted, began defaulting in large numbers as the economy fell apart.
Still, the bank is committed to small business financing, Durrant said, pointing out that Bank of America lent $12 billion to small businesses nationwide in the past year. The institution’s small business efforts are now largely focused on non-SBA loans and microloans through community development financial institutions such as the Valley Economic Development Center in Van Nuys.
Shifting priorities
Indeed, several major lenders have shifted the focus of their small business lending away from SBA.
Capital One, which was the sixth largest SBA lender in Los Angeles in 2008 with 161 loans, did not make a single local SBA loan in 2009.
In a statement to the Business Journal, the financial services giant, based in McLean, Va., said it will continue offering small business credit cards, but it made the decision last year to stop offering national closed-end small business loans.
Meanwhile, JPMorgan Chase, which made 176 SBA loans in 2008, originated 24 this past year, while Citigroup Inc.’s production fell from 97 loans to just four. Neither JPMorgan Chase nor Citigroup returned calls requesting comment.
Antonio Zate, the L.A. regional sales manager for Wells Fargo, said he has noticed many lenders reallocating resources away from SBA.
“There are banks – national, large banks – that have pulled back significantly,” said Zate, who was hired last year to help grow the bank’s SBA division. “Most lenders have significantly cut back their lending programs as well as practices.”
Wade Francis, president of bank consulting firm Unicon Financial Services Inc. in Long Beach, said many large institutions, under pressure from shareholders and government officials alike, are reevaluating their priorities. Some banks are now focusing on loan programs with the highest profit margins, he said, which would not likely include the typically small SBA loans.
“Really large banks have been trying to reshuffle their balance sheets because of capital concerns,” he said.
As a result, an opportunity has opened up for many smaller banks to fill the void.
East West Bank, for one, slightly increased both the number and size of SBA loans in 2009, when it made 19 loans for $8 million. The Pasadena institution, owned by East West Bancorp Inc., hired new SBA loan specialists and began promoting the loans through newspaper advertisements, business fair appearances and other grassroots efforts, said Emily Wang, senior vice president and director of marketing for East West.
“We did promote SBA loans in a moderately aggressive way,” she said.
Likewise, Bank of the West, a regional bank headquartered in San Francisco, has built a dedicated SBA team over the past year and a half in a concerted effort to bulk up its small business lending.
“We’re looking to grow the business,” said Don Mercer, senior vice president for the bank. “As volume grows, we’re looking to add more and more personnel as it relates to SBA.”
Though still a small lender in Los Angeles – it made just two loans in the L.A. district in 2009 for a total of $3.7 million – Bank of the West, a subsidiary of BancWest Corp., has targeted Los Angeles as a key market and Mercer said the bank expects to significantly increase its small business lending in Southern California.
But some lenders are worried that loan applications could drop considerably in the coming months.
A pair of provisions in the government’s stimulus package meant to encourage SBA lending recently ran out of funding. The provisions, credited with increasing SBA lending in recent months, raised the amount the government will pay the bank in case of default from 75 percent to 90 percent of the loan value and eliminated certain fees.
With supporters pushing Congress to renew the programs, industry observers are hopeful that SBA lending could return to prerecession levels.
“From where I sit, I feel optimistic,” said Alvarado, of the local SBA office. “But from the businessman/businesswoman’s perspective, it’s hard to be optimistic.”
Secondary concerns
Along with its decision to expand its SBA origination team, Bank of the West got out of the secondary market for the loans. It had been a major player in the market, buying and selling securitized loans primarily from community and regional banks.
When the economy began reeling in early 2008, the secondary markets froze up, forcing many players to pull back, including Bank of the West.
The secondary market for SBA loans plays an important role in providing liquidity for smaller lenders, insiders said. Rather than holding loans on their books, many banks opt to sell the loans into the secondary market, which provides money to make additional loans.
“It’s lucrative to package these loans up and sell them on the secondary market,” said Tom Millon, chief executive of Capital Markets Cooperative, a company in Ponte Vedra Beach, Fla., providing secondary market services to financial institutions.
The problems in the market, however, spilled over into 2009, leaving many SBA lenders high and dry. Indeed, some point to the stalling of the market as a major factor in suppressing SBA origination.
Recently, though, the secondary market has shown signs of life.
“It is functioning today,” Millon said. “The SBA loans, there are fewer of them, (but) the secondary market is functioning quite well.”
