Lending to Small Business: Banks Are Still Shy

For months, Matthew Barnes, owner of Cider Press Tile in Portland, Me., had been seeking a $50,000 loan to help fund his day-to-day operations. His $100,000 high-end custom tile business had successfully survived the last recession, but this time, customers had drastically cut back spending on luxury items such as his $30 four-inch-square tiles. In March, Barnes threw in the towel and completed the sale of his one-person company to a competitor. Of the banks who refused him a loan, he says, "Unless it was a slam dunk and you collateralized your house and spent all your own money first, they did not want to talk to you."

The $787 billion stimulus package has funneled unprecedented amounts of money into the nation's financial system, but business owners like Barnes say the impact on entrepreneurs has been minimal. A June survey by the National Federation of Independent Business found that the percentage of business owners who found loans harder to get was near historic highs. Despite programs designed specifically for them by the Small Business Administration, many small business owners say banks just won't lend. And many bankers themselves concede they are seeking only the best credit risks. "Banks are fighting over the most creditworthy [small businesses]," Martha Seidenwand, SBA program operations manager for KeyBank in Cleveland, said in May. SBA Administrator Karen Mills says while much of the $730 million the SBA has been allocated from the stimulus package has gone to raising the maximum guarantee on its 7(a) loans to 90%, it has also helped the SBA give business owners $6.2 billion in new loans since Feb. 17.

While lending in the portfolio was still down dramatically for the year as of June 30, there are nascent signs of recovery. The Administration approved nearly $2.5 billion in new 7(a) loans in its third quarter, up 55% from the second fiscal quarter.

Smaller banks that specialize in SBA lending say the Administration's changes have helped. "The 7(a) market has come back quite nicely," says Reese Howell, CEO of Celtic Bank in Salt Lake City. Celtic has a portfolio of about $350 million of 7(a) and 504 loans, which small businesses can use to purchase property and equipment. Prior to last fall's market crash, the bank had more demand for equipment funding and expansion loans. Now it is seeing the most creditworthy small businesses, ones that would previously have sought conventional financing, come to Celtic for SBA loans for working capital. "The better borrowers had more alternatives before the crisis," says Howell, who expects his bank's SBA loan volume for 2009 to grow by 30%.

But with the SBA's new America's Recovery Capital Loan Program loans, which are emergency loans capped at $35,000 with a 100% guarantee and 0% interest, banks have taken a wait-and-see approach. During the program's first month, 180 banks originated 371 loans worth $12 million. Mills says the program, which received $255 million of stimulus money, aims to help about 10,000 businesses eventually. But Robert Seiwert, senior vice-president at the American Bankers Assn.'s Center for Commercial Lending & Business Banking, says many bankers aren't interested, even with the full guarantee. "Those loans are attracting borrowers with a high credit-risk profile at a time when regulators are clamping down," he says. "Bankers are not eager to add to the delinquency numbers of their portfolio."

Meanwhile, conditions in the secondary market, where guaranteed portions of SBA-backed loans are sold to investors, remain tepid. That's likely to keep lending restrained for months. Unfortunately, many entrepreneurs can't wait.

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