Small-loan program gets smaller
Inspired by her mom’s brown-sugar cookie recipe, Barbara Schiller whipped up her first body care product -- a creamy sugar scrub -- in the kitchen of her Hancock Park home five years ago.
Today, after a year of sales at 11 local Whole Foods markets, Schiller is wrapping up work on a new line of creams and scrubs using money from a $50,000 Community Express loan from the Valley Economic Development Center.
“It’s hard to get a loan as a start-up, brand new business,” said Schiller, who calls her company Body Confections.
Getting approved in December was a simpler process than she had expected.
“If you have a dream, you should go for it,” Schiller said.
That may be harder now for other small-business owners hoping to get a Community Express loan, which is geared to women, minorities, veterans and business owners in low- to moderate-income areas.
The Small Business Administration recently clamped down on the number of these small loans that some lenders are allowed to make, potentially leaving hundreds of borrowers without access to the specialized loan to start or expand their businesses.
The SBA took the step because the growing popularity of the loan program has bumped it up against a congressional cap for the first time since the agency launched the pilot program almost a decade ago.
The number of loans under $35,000 jumped 40% to 7,000 in the 2007 fiscal year ended Sept. 30, compared with 5,000 in the previous year, SBA records show.
By law, the number of Community Express loans can’t exceed 10% of all so-called 7(a) loans, the family of basic loans guaranteed by the SBA. The rule has become an issue recently as the slowing economy has helped drive down the number of 7(a) loans.
Superior Financial Group of Walnut Creek, Calif., which said it was the No. 2 Community Express lender nationwide, can’t make more than 75 of the loans a month compared with the 400 or 500 a month it had been making.
Innovative Bank of Oakland, the most active SBA lender in the Los Angeles district, said it was limited to 200 Community Express loans a month nationwide. It, too, had been producing 400 to 500 of the loans each month. In the three-county L.A. district, the bank made 317 such loans from January through May of this year.
“That’s going to have an impact on small businesses,” said Young Ho Won, executive vice president and chief credit officer at Innovative Bank.
The loans have been popular because they often don’t require collateral, the paperwork is minimal, and a lack of business history or a sterling credit rating doesn’t disqualify applicants.
Schiller, who said she has good credit, appreciated the loan’s no-collateral provision and the focus on a venture’s future cash flow rather than past income statements.
“It’s hard to walk in with just an idea,” Schiller said. “If I screw this up, they are not going to own anything.”
The loans, which also can be used for temporary working capital, are available in the small amounts that most banks don’t want to handle. Innovative Bank, for example, offers loans from $5,000 to $50,000 under its Small Office/Home Office program.
To encourage lenders to make loans to those with potentially higher credit risk, the SBA guarantees 85% of the loan, up to $150,000. By comparison, the agency’s standard Express loan carries a 50% guarantee.
The loan cap is in place because Community Express is still a pilot program. Some lenders are urging a speedy shift to permanent status to lose the cap, which is effective at least through the end of September but probably will remain into fiscal year 2009. Lenders also are nervous about the uncertainty of future limits.
The SBA has no immediate plans to change the status. Concerned about what it said were high default rates, the overall expense of the pilot program and the fact that lending has been concentrated among a handful of lenders, the agency said it had asked its inspector general’s office to audit the program “to ensure that the program minimizes fraud, waste and abuse, and truly delivers good loan products at reasonable prices to underserved borrowers,” the agency said.
Recommendations are expected sometime this year.
“It has not performed as well as other portfolios and has grown over time, so that has a little more impact than it has in the past,” said Janet Tasker, SBA deputy associate administrator for capital access.
Small-business borrowers have been feeling the effects of the cutbacks. At Los Angeles-based PACE, one of the small-business development groups that work with Innovative Bank, Community Express loan denials are up, credit requirements have tightened and loans for certain types of businesses, including fashion and acupuncture, are being discouraged.
Lenders said they would turn to other SBA loans, including the standard Express and export finance, to try to fill the gap.
Meanwhile, Schiller has graduated from the ranks of Community Express borrowers and is getting ready to apply for a larger 7(a) loan. She needs $300,000 to get her new Body Conscience line into production and onto the shelves of retailers such as Fred Segal and Barneys New York. Boxes alone will cost $19,000, she said.
“It can be daunting,” Schiller said. “But once you decide to do it, you’ve got to go for it, and I plan to with the SBA’s help.”
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Community Express lenders
Five lenders accounted for all of the SBA’s Community Express loans made through May this year in Los Angeles, Ventura and Santa Barbara counties.
Innovative Bank: $6,665,000
Superior Financial Group: $587,500
Borrego Springs Bank: $125,000
CorTrust Bank: $41,000
Business Loan Center: $40,000
Total: $7,458,500
Source: Small Business Administration
