Bankers throughout Koreatown are seeing warning signs on small business lending.

Restaurants, print shops, dentists, small manufacturers, law firms – almost every kind of small business – have sought to refinance the variable interest rate loans guaranteed by the U.S. Small Business Administration after four successive interest rate hikes by the Federal Reserve in 2018.

“The data is pointing out that we need to be cautious,” said Joanne Kim, chief executive of Koreatown-based CBB Bancorp Inc., parent of the $1.16 billion-in-asset Commonwealth Business Bank. “I still have vivid memories of 2008.”

Other bank leaders echoed her sentiment.

“We are starting to see some signs of late payments with our small-business loans,” reflected Min Kim, chief executive of OP Bancorp, the downtown-based parent of the $1.1 billion-in-asset Open Bank.

“Sales are either softening or (businesses’ profit) margins may have been squeezed in the last six months,” she said. “We’ve seen some prepayments pick up in the last six months.”

The longest government shutdown in history, which ranged from Dec. 22 to Jan. 25, also caused some indigestion for the banks. CBB Bancorp was preparing a contingency plan to offer some SBA borrowers temporary commercial loans that could be transitioned to SBA-guarantee financing once the government reopened. Just as the bank was readying the first of the loans on commercial terms, the government reopened, putting the plan on the backburner, according to CBB’s Kim.

Other local banks cited similar moves.

Min Kim said OP Bancorp actually funded a few small-business loans as commercial loans that had moved deep into the escrow process when the government closed down, only to convert to SBA loans once it reopened.

Bigger issues

While the short-term headache of the government shutdown is over, the longer-term issue with SBA loan programs at banks such as OP and CBB remain.

As the economy has improved and real estate prices have soared since the Great Recession, businesses that once could only access credit via SBA loans, which are guaranteed by the federal government and capped at $5 million, can now shop around for better terms.

SBA loan terms are typically longer – often paid over 25 years – and have variable interest rates. As rates have risen – the Fed raised rates four times last year – monthly payments for borrowers have risen, driving many, according to bankers, to look for alternative lending arrangements. These arrangements are often commercial loans on a fixed rate and with shorter terms.

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