Airplane propeller repair shop hits credit turbulence

At a repair shop for airplane propellers near Van Nuys Airport, Keith Hironaka bends over a long metal blade, smoothing its mottled surface and preparing it for inspection. His brother Glenn works a few feet away.

Fifteen people depend on Executive Propellers for their jobs, and owner Eissa Shousha figures an additional 60 or so -- wives, children, aging parents -- rely on the salaries he pays and the health insurance he provides.

But business is slow, as many owners of small planes have cut back on flying and put off refurbishing their aircraft in the recession.

The pressure to survive grows daily at this small business and thousands like it as the nation’s economic downturn maintains a tight grip on the Southern California economy.Many are seeking loans to survive the crunch, but credit is scarce.

Data from the Small Business Administration show that despite an uptick toward the end of the year, banks in 2009 made only a third as many SBA-backed loans as they did in 2007.

Even though President Obama has asked Congress to provide $30 billion for banks to lend to small businesses, experts and many in the banking industry shake their heads in doubt.

“Banks have balloons and signs out front, and they say, ‘We’re your partner,’ ” Shousha said. “But when you ask for the manager, no one is available.”

Nowhere is this small-business squeeze more palpable than in Southern California, where more than half the jobs -- about 2.8 million positions -- in Los Angeles and Orange counties are at 288,093 small businesses, according to the U.S. census. Statewide, small-business bankruptcies soared 81% last year, nearly double the national average, according to credit firm Equifax.

When Executive Propellers’ business took a nose-dive during the recession, Shousha and his staff prepared a 4-inch-thick binder explaining how their business worked and how they would retool it to survive.

The idea was to expand the business beyond the small private planes whose owners are more affected by hard times than those who own larger aircraft.

But to fix the firefighting aircraft and other planes he thought would save the business, he needed larger tools, new employees and more space.

Shousha and his controller, Michelle Mercier, met for hours with the officers of local banks, only to be rejected via form letters. His creditworthiness was hurt by the thousands of dollars he spent each month on health insurance for his employees and his lack of home equity.

“If I didn’t provide insurance,” he said, “if I hadn’t put equity from my own home into the business, they might have approved me.”

He finally obtained a loan from a nonprofit community lender, but he figured he lost months of potential recovery time along the way.

Many small businesses are caught in a trap that homeowners will recognize: Their balance sheets have been pushed into the red by the recession, and local banks, stung by bad loans made during the real estate bubble, have tightened lending standards.

A big part of the problem is that it’s hard to predict which businesses will succeed if they get help and which ones will fail anyway.

Roberto Barragan, whose Valley Economic Development Center provided two loans worth about $1.15 million to Executive Propellers, said he believes Shousha’s plan will work.

“They have a great business plan,” said Barragan, whose team of credit advisors and community development experts went through Shousha’s documentation in detail. By retooling, he said, Shousha will be able to pick up clients from competitors that have gone out of business.

But that may have seemed like too much of a gamble to banks, which must answer to federal regulators and often shareholders when explaining their decisions in making loans.

Data gathered by the Federal Reserve show that banks started tightening their standards for loans to small businesses around mid-2007 and still have not begun to loosen them. As recently as last month some were still tightening.

Banks say the problem is largely one of demand: The strongest businesses have chosen not to expand or take on debt.

“Applications for new credit are down 45% over last January,” said Kathie Sowa, a top Bank of America small-business credit executive. “They have less need when their sales are down.”

Alberto Alvarado, who directs the Small Business Administration’s operations in the Los Angeles area, is skeptical.

“You would think that the good businesses dried up, that the earth swallowed them up,” Alvarado said. “And that’s just not the case.”

At most banks, companies must show that they have been profitable for up to three years with collateral to back their loans.

Banks are sticking closely by those rules -- and for good reason, they say. Many have been weakened by bad bets on real estate loans. Two of the top five lenders to small businesses in the L.A. area, Innovative Bank and Excel National Bank, have been ordered by federal regulators to improve their financial positions or risk being taken over.

Richard Bove, a banking analyst with Rochdale Securities, said banks should be cautious. “Who needs more debt in the United States at this time?” he said.

Others say that banks should look beyond the standard criteria in this environment. One closely watched effort is underway at Huntington Bancshares of Ohio, which aims to make $4 billion in small-business loans in the next few years.

Instead of requiring customers to show a profit for each of the last 36 months, as it had previously, Huntington will lend to those who have had some unprofitable months if their underlying business seems strong, said Senior Executive Vice President Mary Navarro.

But Huntington’s approach is rare.

Small-business loans are inherently riskier than mortgages or other types of lending, because the firms frequently run into financial trouble. The SBA does guarantee many of the loans, but borrowers often avoid them because the agency charges fees of up to 3.5% of the loan and frequently imposes prepayment penalties.

In 2009, the agency waived some fees and promised to guarantee up to 90% of loans to small businesses, which helped boost activity. Congress renewed that program this month. But overall activity is still down.

At Southern California’s top SBA lender, Wells Fargo Bank, executives say they are committed to helping their customers, but not by loosening standards.

“We want to make sure we give loans to customers who have the cash flow to pay back a loan,” said John Sotoodeh, Wells Fargo’s regional president for the Los Angeles area.

At the propeller repair shop, Shousha has used the $250,000 he initially borrowed from the Valley Economic Development Center to hire two people and buy tools to work on larger planes.

Business is still down but propellers from firefighting planes and vintage aircraft are starting to come in, their blades in wooden crates or stacked against the walls.

“Nobody believes this business will be what it was three years ago.” Shousha said. “But I believe that it will be. We just have to wait.”

sharon.bernstein@

latimes.com