Borrowing Trouble : Small-Firm Owners Still Awaiting SBA Quake Relief
To hear some small businesses tell it, the Northridge earthquake was only the first jolt. The aftershocks began when they turned to the Small Business Administration for help.
Most small-business owners are still waiting for assistance as the SBA doles out the money at a snail’s pace--and with homeowners at the front of the line.
The now-familiar list of destruction from the Jan. 17 temblor--at least 57 dead, up to $20 billion in losses, six freeways mangled, more than 4,300 buildings damaged--includes losses for at least 100,000 small companies, most of which had no earthquake insurance to cover the blow to buildings, inventory, equipment and revenue.
So far, the SBA has approved more than $700 million in low-interest loans, but mostly for homeowners. Barely $2.6 million has reached business owners.
The demand for disaster assistance seems to have overwhelmed the agency. But beyond the gargantuan snags, the hard truth is that many businesses--already in hock to the hilt or teetering from the effects of the long Southland recession--simply can’t qualify for SBA loans.
And for the businesses that can’t qualify, there is not much help available.
“I’m really angry, because they give you this big BS scenario about $8.6 billion to help repair earthquake damage. Well, where is it?” complained one Santa Monica retailer, who asked that her name not be used so customers and suppliers won’t discover the financial mess that the earthquake has left her in.
The woman said she applied for a $20,000 loan from the SBA to cover damage to her store’s contents as well as loss of business. Weeks later, the SBA could not tell her whether additional paperwork she sent had arrived safely.
Several blocks away, in one of Santa Monica’s hardest-hit retail areas, the quake bounced Jason Douglas-Hiley out of his hair salon, the Yellow Balloon, which caters to children. Only the hospitality of a nearby beauty shop owner allowed him to stay in business until he was allowed back into his own salon two weeks ago. The SBA has been decidedly less helpful, he said, misplacing his request for business and home loan applications for more than a month.
“It’s very frustrating,” said Douglas-Hiley, who has yet to see an SBA damage “verifier” at his business. A verifier finally appeared at his damaged Northridge home on March 24, “so at least I’m starting to feel like there’s some movement.” He and his wife, Denise, have spent hours on the phone and in disaster assistance centers to straighten out the problem, in between tending for their infant daughter, born one week after the quake.
“I have 12 employees,” Douglas-Hiley said as he passed out balloons and hand stamps to his squirming clientele. “Those people have to make a living. Southern California is not in great shape anyway.”
Similar tales abound of endlessly busy phone lines, misplaced paperwork, delays, verifiers who don’t show and questions on loan forms that can’t be answered. Small Business Administration officials acknowledge that there have been problems but insist that they are attacking them and improving the agency’s performance.
Certainly not all the reviews have been bad. The SBA has received praise for its quick response and flexibility in the early days after the earthquake, including an on-the-spot decision by SBA chief Erskine B. Bowles during a Southern California tour of destruction to raise the $1.5-million loan limit for individual loans to some small and medium-size companies. Victims have lauded the kindness and patience of SBA and Federal Emergency Management Agency employees.
But many small companies that turned to the SBA for help now are finding that the agency is severely backlogged, with loan applications stacked up more than two months after the costliest natural disaster it has ever faced.
Others who had sought aid said they simply gave up when confronted with the rigorous paperwork requirements to get an SBA business disaster or economic injury loan. And these are the new, simpler loan applications developed after last year’s Midwest floods.
Of course, bashing the SBA and FEMA, its partner in disaster relief, is always a favorite post-cataclysm sport. FEMA, the umbrella agency for emergency assistance, was reorganized last year after damning evaluations of its performance following the 1992 Los Angeles riots, Northern California’s Loma Prieta earthquake, Hurricane Andrew in Florida and Hurricane Iniki in Hawaii.
The SBA, which hands out government low-interest loans to homeowners and businesses after a disaster, also did some program tinkering last year. The paperwork requirements for business loans were cut in half.
This time, part of the grousing stems from the sheer magnitude of the disaster. In addition, Clinton Administration officials who promised speedy help right after the shaking stopped have acknowledged that they may have raised victims’ hopes unrealistically.
But underneath all the growing frustration is a kind of innocence lost as, one by one, business owners discover an ugly fact about disasters: Damage to your home is bad, but damage to your business is worse.
That’s because most disaster relief historically has been geared toward middle-class homeowners. Entrepreneurs, including owners of commercial apartment buildings, come in a distant second, said Mary Comerio, a UC Berkeley architecture professor who studied FEMA and SBA response to housing problems after the Loma Prieta earthquake.
Most of the government’s relief programs were developed for rural areas where there was less need to help apartment or business owners, she said. There is no equivalent of FEMA housing vouchers or grants for private enterprise.
“There are lots of misperceptions around in the public mind,” Comerio said. “One is that the government will help you after a disaster. Another is that it all will be OK soon. In reality, rebuilding takes a tremendous amount of time.”
Don Ivone has already figured that out. The Burbank real estate broker suffered $50,000 worth of broken windows, wall cracks and water damage when a pipe in his office’s ceiling burst during the quake. He applied for an SBA loan two months ago and can’t find out where his application stands.
“We’ve made several phone calls and we’ve been left in Muzak limbo forever, and it just becomes cost prohibitive for us to stay on the phone,” said Ivone, president of California Real Estate Services. “We’re like the Energizer bunny. We’re still waiting, still waiting.”
For the SBA, responding to the Northridge earthquake has been akin to setting up a Fortune 500 company almost overnight. What’s more, this instant organization must deal with complicated financial documents and a crush of customers who have just been through one of the worst experiences of their lives.
“Unfortunately, we’ve had many opportunities to get better and better at it,” said Tom MacKenzie, Sacramento-based assistant administrator for the SBA’s sprawling Western region.
This time, that meant jumping within a few weeks from 300 to more than 2,500 employees handling disaster response in the region. More than half were new, untrained hires. Telephone lines and nearly 100 operators were added. Facilities were rented and furnished.
Raining down on them was an unexpected torrent of loan applications from homeowners and businesses. In the two and a half months since the quake, the SBA already has received more applications for earthquake-related disaster loans than it collected after any other disaster--even months later, when it came time to close the books. Even so, the SBA is averaging more than $20 million in loan approvals a day; agency officials used to consider $5 million in approvals a good day.
Indeed, the agency has won many fans with its initial fancy footwork.
“It’s the most impressive response I’ve ever seen from a government agency,” said John J. Rooney, president of the Valley Economic Development Center, a nonprofit organization that estimates it has helped more than 5,000 companies fill out earthquake disaster loan applications. “My hat is off to them.”
In the first month alone, the SBA issued nearly 300,000 applications and got back slightly more than 46,000. By comparison, applications issued after Hurricane Andrew--the previous record-holder in the disaster derby--reached nearly 48,000 in the first month; 5,700 were sent back completed.
The SBA shuffled more paper (5,715 applications processed) and approved more money ($93.3 million in home and business loans) in the first month after the quake than ever before. But despite that pace, the proportion of applications processed actually was much smaller than in previous disasters, because the demand was so huge. About 40,000 applications sat unprocessed.
“The big challenge for them is, because they’re going to have an unprecedented number of applications filed, getting them processed,” Rooney said. “They have such a big bubble to swallow.”
Bernard Kulik has been running the SBA’s disaster assistance program for 12 years--long enough to earn the nickname “Master of Disaster.” Kulik defends has agency’s response while acknowledging that there have been problems in getting loan applications through the system.
“We’re knocking ourselves out to do it. We’re attacking it tooth and nail,” Kulik said.
“Obviously, we’re not doing it as fast as we would like,” he said. “Whatever delay we’re dealing with is because of the volume. The numbers are enormous.”
On average, it is taking the SBA two to three weeks to process home loan applications to the point of approval or rejection and four to six weeks for business loans. Businesses can receive loans for actual damages as well as for “economic injury” suffered because they were closed for a time or because revenues dropped after the quake.
As of March 31, the SBA had approved 1,319 business and economic injury loans totaling $75.9 million and 23,724 home loans totaling $664 million. But of those totals, the agency had actually issued only 238 checks to businesses for a total of $2.6 million. Homeowners had been issued 4,215 checks totaling $40.7 million.
Homeowners have been getting a bigger chunk of the cash primarily because such loans are easier to process, Kulik said, adding that the SBA has no formal policy putting homeowners ahead of business owners after a disaster. The amount of money actually in the hands of business owners so far appears relatively small partly because the SBA pays out in installments and because the agency cannot control how quickly applicants return their closing documents, he said.
But here’s another fact that upsets many entrepreneurs: Of the 50,000 or so companies that are expected to apply for SBA loans, 15,000 to 25,000 of them will never see a dime.
Plenty of homeowners will be rejected, too, but the turn-down rate on those loans is lower; homeowners generally have been in better shape financially than businesses and can more easily qualify for the income-based loans.
Businesses have a harder time demonstrating that they are credit-worthy. Many earthquake-damaged companies had already been slapped around by the recession and the restructuring of the aerospace and financial services industries. To them, credit was a foreign word even before the earthquake struck.
“So many of these businesses were just hanging on by their fingernails, and they’re just not going to qualify,” said Jack Kyser, economist for the Economic Development Corp. of Los Angeles County, a nonprofit jobs promotion agency. “The SBA is being a prudent lender. These are loans, not grants.”
The SBA’s Kulik said the disaster loan program was not set up to help with pre-existing economic problems.
“We are a lending organization, but by law we have to find a reasonable ability to repay,” Kulik said. “We don’t make loans if the only way we can collect is to foreclose.”
If a homeowner is denied a loan, that person is referred to a grant program administered by FEMA and the state.
“Unfortunately, there is no safety net for business. There is no grant program that underpins business,” Kulik said.
Many businesses damaged in the 1992 riots found FEMA and SBA unresponsive. The overall rejection rate was 50% to 60% for loan and grant programs to homeowners and businesses after the disturbances, studies found at the time.
After the 1987 Whittier Narrows earthquake, few businesses in the severely damaged Whittier business district saw any SBA loan money for nearly a year, according to a National Science Foundation-funded study conducted by Robert Bolin, a professor at New Mexico State University. Between the slow funding and local redevelopment controversies, little rebuilding occurred in that time, Bolin found.
Citing such experiences, disaster relief expert Richard Walden had once wanted to see FEMA abolished, though he now thinks the agency is doing a better job. Still, he would like to see the SBA ease up even more on its lending requirements.
“These little mom-and-pop businesses find it almost impossible to convince the SBA that they are viable,” said Walden, president of Operation USA, an international, nonprofit, disaster relief and development organization. “In a post-disaster scenario, lending standards should be easier.”
Walden also suggests that the government give the disaster loan money to private banks and allow them to administer the programs. “At least the banks are already set up to do it,” he said. Outside of disasters, the SBA makes few direct loans, instead guaranteeing loans made by private lending institutions to small businesses.
At Big Valley Music in Northridge, the windows advertise “Big Shakedown Sale.” But Carol Ozanian, president of the company, has decided that the biggest shakedown of all has been disaster relief.
“The reality is, there is no Santa Claus,” said Ozanian, who expects to spend several thousand dollars to repair her roof and replace inventory. Ozanian is going it alone because she thinks the SBA would turn her down after finding out she already has two SBA-guaranteed loans.
“The paperwork is horrendous,” she said. “It takes a tremendous amount of effort to fill them out. . . . I didn’t want to go through the whole process, only to be turned down.”
Choked Pipeline The Small Business Administration’s disaster assistance loan program is a primary source of funds for business and apartment owners trying to repair and rebuild after the Jan. 17 earthquake. Many seeking loans complain that the SBA bureaucracy is moving slowly, though agency officials say they are moving as quickly and responsibly as possible, given an unprecedented volume of applications. Here are the numbers as of March 31. * Applications issued: 412,270 Homeowners: 294,307 Businesses, apartments: 117,963 * Applications completed: 148,251 Homeowners: 116,985 Businesses, apartments: 31,266 * Loan decisions (approvals and denials): 41,739 Homeowners: 39,178 Businesses, apartments: 2,561 * Loan approvals: 25,043 totaling $739.9 million Homeowners: 23,724 totaling $664 million Businesses, apartments: 1,319 totaling $75.9 million * Funds disbursed: $43.4 million Homeowners: 4,215 checks totaling $40.7 million Businesses, apartments: 238 checks totaling $2.6 million Source: Small Business Administration
After Disasters
The Northridge earthquake of Jan. 17 has generated far more loan applications to the Small Business Administration than any other disaster. Here is a comparison of the loan activity produced by three recent disasters in the first month after the event.
NORTHRIDGE HURRICANE 1993 MIDWEST EARTHQUAKE ANDREW FLOODS Applications issued 293,517 47,954 49,438 Applications returned to SBA 46,023 5,704 4,663 Applications processed 5,715 3,251 3,423 Applications approved 3,036 1,790 2,267 Amount approved $93.3 million $52.4 million $42.9 million
Source: Small Business Administration * RELATED STORY: A1
