After a number of years of reduced funding, and following a precipitous drop in loan volume last year, the U.S. Small Business Administration's Spokane District is expecting an upturn in activity under the Obama administration.
The stimulus bill signed into law by President Obama last week allocates $375 million to the SBA to be used specifically to waive fees charged to businesses under its two main loan programs this year and into 2010, says Gilbert Acevedo, president of the Spokane-based Northwest Business Development Association, an SBA-approved Certified Development Corporation.
Acevedo says he hopes that the funds, which will save borrowers about 2 percent of a loan amount in fees under the 504 program and between 2.25 percent and 2.75 percent under the 7(a) program, will break a logjam of reticence on the part of both lenders and borrowers.
"For Northwest business, for the lending climate, not only have banks retrenched, the small-business customers aren't going to the bank," he says. "They have come out, seen their shadows, and said, 'We'll come back in six weeks.'"
There are two main types of SBA loans: 504 loans, which can only be used to buy or improve land or buildings or to acquire long-term equipment, and 7(a) loans, which can be used for those purposes plus such things as startup or working capital. Both loans offer significant guarantees to the lender, but are structured differently.
The nonprofit NWBDA is one of three Certified Development Corporations, or CDCs, in Washington state authorized to work with SBA and private lenders to make 504 loans, designed to further SBA job creation, economic development, or public policy goals. Under the new federal stimulus package, the number of jobs a business must create when it receives a 504 loan under the job creation criteria will be raised to one job for every $65,000 it borrows, from the current requirement of one job for every $50,000 it borrows and might make the allowed uses more flexible.
To be eligible for a 504 loan, a business must have a net worth of less than $7.5 million, and have had an average net income of less than $2.5 million in each of the previous two years. A qualified business can receive a loan of up to $1.5 million in the job creation or economic development programs, up to $2 million when the proceeds meet certain public policy goals, such as business district revitalization or expansion of exports, and up to $4 million for small manufacturers under certain conditions. The business must come up with at least a 10 percent down payment, and the NWBDA then agrees to cover 40 percent of the cost through a separate loan that it approves from a pool of funds provided by the SBA, giving the private lender a 50 percent loan-to-collateral-value ratio.
Under the 7(a) program, banks lend up to $2 million to a borrower, and receive a federal guarantee for much of the loan, reducing the banks' risk. The lender sets the interest rate, up to a maximum rate set by the SBA. For the borrower, an advantage of using the 7(a) program over a conventional commercial loan is that the loan can be paid back over a much longer period of time.
The recently passed stimulus package also will raise the federal guarantee on 7(a) loans to 90 percent, from 75 percent to 80 percent currently, Acevedo says.
The NWBDA, which saw its loan volume fall 27.4 percent last year with the cooling economy, now is expecting a surge in activity, and is hiring additional staff in anticipation, due to the stimulus measure, Acevedo says.
"I anticipate when this picks up, everyone's going to be busy," he says. Still, things have been slow lately, he says.
Loan volume at the SBA's Spokane district, which covers 20 Eastern Washington counties and 10 counties in North Idaho, fell last year by 10 percent, but Ted Schinzel, the agency's branch manager here, says that's not too bad, compared with the national decline in SBA lending.
Nationwide, SBA loan volume plummeted 57 percent in 2008, and that's from a 2007 level that was down about 30 percent from the agency's annual average of about 100,000 loans a year.
This fall, however, volume in the Spokane district began falling off more dramatically, Schinzel says.
Not only are volumes down, but the failure rate on SBA loans doubled between 2006 and 2008, Schinzel says. Back in 2006, of the about 3 million loans in the SBA portfolio, the failure rate was about 10,000 loans, worth a total of about $500 million. Last year, the failure rate was nearly 27,000 loans, for about $1 billion, Schinzel says, adding, "In 2009, it's going to be worse."
There is some optimism, however. Both Schinzel and Acevedo say they expect an overall reemphasis on the SBA during the Obama administration, after the SBA budget for its staff and office operations fell to $4.5 million from $8 million over the last eight years.
"We were the hardest hit agency of the federal agencies over the last eight years, Schinzel says. "We went from 3,200 people down to 2,100."
He says he believes the SBA now will start getting more funding. Both he and Acevedo assert that the Obama administration understands that most new jobs are created through small-business growth. Schinzel says he sees a difference already.
"There's a different sense of urgency. There seems to be an increased level toward helping small business," he says.
Says Acevedo, "I think on an average basis, more jobs are created with small businesses. The new administration recognizes that fact and is going to put more horsepower behind SBA, and help businesses get the funds they need. I'm predicting SBA is going to be a lot bigger and stronger."
Schinzel says about 70 percent of lenders nationwide have tightened their credit standards over the last year.
Though Schinzel says in many cases, businesses now require customers to have "gold-plated" credit to get a loan, Acevedo says that, at least in the case of the NWBDA, credit standards haven't changed.
Schinzel says borrowers need to have a business plan, a credit score of at least 725, and a good cash-flow or equity position. Also, businesses sometimes now must put more money down than before.
"Say that you're trying to get a loan for $100,000. Maybe you (previously) only needed to put in 20 to 25 percent. Now you might have to put in 30 percent," he says. "It has to look strong."
Also, banks are shying away from big-dollar projects, Schinzel says. He says businesses related to the construction and restaurant industries are having the most difficult time securing loans right now.
One thing NWBDA is doing to try to offer borrowers another option is to launch what's called an "edge loan" program, Acevedo says. Some banks have already expressed interest in the concept, through which a number of participating banks would share the risk of loans made to businesses that otherwise would have difficulty qualifying for loans. Acevedo says such borrowers still would need to have good credit, but might lack as much down payment or fall shy of some other lending standard.
Schinzel says it's not just credit tightening by financial institutions that has cooled the lending climate. Small businesses have avoided seeking a loan. They aren't hiring and they are trying to hold off on projects, he says.
Many businesses, however, now are experiencing cash-flow problems and could use a short-term line of credit, Schinzel says.
"What we're finding is they can't get a loan. They maybe only need $25,000 to $50,000," he says.
Acevedo says he's also noticed a reticence on the part of borrowers.
"Banks are being cautious, but they don't make money if they don't loan money," he says. "People are toning down their requests. If they were doing major remodeling, they've slimmed it down. If they could put things off, they have. They've had that wait-and-see attitude."
Says Schinzel, "Most businesses haven't been through a 25-year cycle and don't have the survival skills" to weather a recession. He advises them to be proactive in seeking both advice and loans as needed.
"The big thing for businesses to understand is don't bury your head in the sand. Get some counseling from the Small Business Administration through SCORE or NWBDA," he says. "If you can, do some repositioning, get it down on paper and get it looked at."
"I think the banks have to be more active and aggressively need to get people to come to the bank, and small businesses have to seek those loans," Acevedo says. He says the market likely will begin to thaw here around the end of March, once businesses have had a chance to finish their taxes and have year-end numbers to show to banks.
"My sense is once some start to lend, they all want to get in the game, and hopefully money will loosen up in the markets," Schinzel says.