Timely fill-in: SBA-backed loans provide capital amid credit crunch
Dr. David Westerberg had the chance to buy into a cosmetic dentistry practice in Palm Desert but found that the credit crunch had chipped away his ability to find money through conventional small-business loans or by tapping his home equity.
Although his house value had gone up, the appraiser was having a tough time finding comparable houses that also had become more valuable.
“The market has changed,” said Westerberg, who already burnishes smiles at a San Bernardino practice. “I found that [bankers] weren’t as willing to lend and it had become much more stringent.”
So Westerberg joined the growing crowd turning to the Small Business Administration for borrowing muscle. As tightening credit rules shut more small-business borrowers out of home equity loans or conventional bank credit, many are seeking loans backed by the SBA.
“We have seen a huge influx of transactions” in the last 30 days, said Roberto Barragan, president of the Valley Economic Development Corp., which connects borrowers with banks authorized to make SBA-guaranteed loans.
Access to capital is crucial for small-business owners like Westerberg, who landed an SBA-backed loan a few weeks ago from Comerica Bank.
These loans, which are issued by banks that team with the SBA, are typically more expensive for borrowers. But they are easier to get than conventional loans because they don’t require the same level of credit scores or collateral, an asset such as equity in a house that is pledged to a lender. They also often offer a longer time period in which to pay back the loan.
That’s good news for small-business owners struggling to find funds. Many have been stymied by the loss of borrowing power inflicted by falling housing prices and rising mortgage interest rates.
Banker Tim Weaver, who runs the SBA loan guarantee program at California Oaks Savings Bank in Simi Valley, has seen a jump in demand for SBA-backed loans at his community bank as the turmoil in the mortgage markets has spread beyond sub-prime borrowers with shaky credit.
“We are getting the reverse effect of the sub-prime market,” he said.
New business owner Gunther Donoso recently turned to the SBA when other options lost their appeal. He was approved for a $35,000 SBA micro-loan through the Valley Economic Development Corp. to open Brownstone Pizzeria in Eagle Rock.
He and his wife, Bertha, had already tapped their home equity twice this year to obtain about $80,000 to start the Colorado Boulevard venture, which will serve New York-style pizza by the slice.
As is often the case for start-ups, the owners eventually realized they would need more money to get the doors open. But tighter standards implemented since they obtained their first home equity loan in January made it tougher to get additional cash out of their house. And Donoso’s debt-to-income ratio probably wouldn’t attract too many conventional small-business lenders, he said.
“A regular small-business loan would have been tough to get, especially since I am up to my nose in debt,” Donoso said.
Melissa Patchett wished she had gone to the SBA first to find funds for her Mas Boutique, instead of trying to work with a loan broker.
She and her business partner, Shannon Benedetti, eventually landed a $7,500 SBA micro-loan. The money will make it possible for them to open their contemporary clothing store on Sunset Boulevard next week.
“I should have gone there the first day,” said Patchett, who is working on getting another SBA loan.
Many small-business owners are looking for funds and, according to a survey released this week by Discover Business Card, the prospect of tighter credit doesn’t bode well.
About 76% of owners in the August poll said that if obtaining credit became more difficult, it would hurt their business.
Until recently, capital was easy to come by for many small-business operators, even those with less-than-stellar credit. If they didn’t qualify for a conventional bank loan, they could tap the equity in their homes, whose values were rising.
The collapse of the sub-prime mortgage market has changed that. A number of mortgage companies have closed in recent weeks, left without funds to lend as the buyers of their sub-prime products withdrew from the market. Unable to refinance, many borrowers have been left with higher interest rates and declining home values.
The turmoil has rocked some of the country’s biggest companies, threatening pending deals and hacking large chunks out of the value of their stocks.
Bankers, though, are wary of calling it a credit crunch.
“I’m not sure I’d describe it as a credit crunch,” said Mike Conboy, executive vice president of small-business lending at Comerica. “Most people have probably increased their standards to issue new debt, so the underwriting is probably tightened a little bit.”
For example, he said, a bank that required a FICO credit score of 650 for a home equity loan in the past might now require a score of 675.
As they tighten underwriting, banks are always aware of the competition they face for small-business borrowers from conventional and SBA lending departments at other banks large and small.
For many of those who no longer qualify for Conboy’s conventional small-business loans, or who don’t care for their requirements, Comerica’s SBA lending department will be a viable option.
“Things are going to percolate and get busier,” said Nancy Russell, head of SBA lending for Comerica’s Western market and dentist Westerberg’s banker.
SBA loans in the three-county Los Angeles district office are already on pace to top last year’s totals.
In the nine months ended June 30, 130 financial institutions made 4,496 SBA-backed loans, according to SBA figures. That’s up from 3,844 loans made by 101 bankers and other institutions in the year-earlier period for the district, which covers Los Angeles, Ventura and Santa Barbara counties.
An SBA-backed loan will not be right for everyone.
Fees can range as high as 3% of the loan value, and there are caps on the size of the loans. Most loans other than those for real estate are limited to $2 million or less. There are restrictions on the size of a business to which an SBA loan can be made. The loans must be fully documented, meaning lots of paperwork that proves income and other financial information.
And although the government typically guarantees 50% to 85% of the debt, the lender will go after the borrower -- not Uncle Sam -- if the loan defaults.
Still, an SBA-backed loan has its attractions when lenders get stingy, partly because of the way borrowers are assessed.
Most other loans focus on the quality of the collateral a borrower has, but an SBA loan typically puts more weight on a business’ cash flow, Russell said. She and other SBA bankers also consider the borrower’s business experience, credit score and collateral being offered.
“Because of what’s going on, “ Russell said, “we are going to become a very important piece of the puzzle for the small-business owner.”
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