Las Vegas Business Press :: News : CREDIT CRUNCH

CREDIT CRUNCH

Number of Nevada SBA loans plunges as banks tighten standards

BY TIM O'REILEY

The term "credit crunch" has come to define current business conditions much as hedge fund did just a few years ago, but mostly with a vague definition framed by anecdotes.

Nevada lending totals for the U.S. Small Business Administration, a key financial lifeline for hundreds of entrepreneurs, highlight in hard numbers how difficult it has become to find financing. The number of loans granted through two main programs plunged 38 percent this year to 740, while the dollar volume sank 27 percent to $201.6 million.

Although this year's numbers run only through Sept. 15, two weeks short of the end of the fiscal year, no one involved in the programs expects them to change very much.

Both the 7(a) loans, which can be used for a variety of purposes, and the 504 loans for property and physical asset purchases are on track for their lowest totals in at least four years.

"I used to be able to predict with a high degree of certainty who would get loans, but not any more," said Leni Roman, the owner of Small Business Assistance, an SBA loan broker. "Loans that I used to think were slam dunks no longer are."

Small business experts attributed the pullback to numerous factors, including tightened lending standards, the SBA rewrite of its hefty policy manual, and reduced demand by small businesses fearful of going into debt.

Not everyone has retrenched. The First Asian Bank has vaulted to the seventh-largest SBA lender in its first year of existence as a way to cultivate the long-term loyalty of small businesses, said President and CEO William Chu.

Particularly hard hit has been the SBA Express program, which has long been the agency's signature financing vehicle. Launched across the country four years ago, it allows banks to grant loans backed by a 50 percent SBA guarantee through a computer-based application. Borrowers are rated through credit scoring. The process and a $350,000 limit generally appeals to very small or service-oriented businesses with little or no collateral; the average Express loan ran $52,000 in Nevada this year compared to $186,000 for 7(a) loans, with its higher limits and heavier documentation.

Express lending in Nevada by dollars has dropped 44 percent this year, as several major banks cut deeply in this area. Bank of America slashed the number of loans it granted from 168 to 44, while Wells Fargo and U.S. Bank also trimmed their presence. Grady Hedgespeth, director of the SBA's office of financial assistance, said climbing default rates nationwide have caused banks to retrench after previously pushing the program aggressively.

"This has been a challenge area for us," said David Kaneda, Wells Fargo's southwest regional manager for SBA lending.

Although the numbers with the longer-established 7(a) program have declined less steeply, they still reflect the banks' efforts to improve their balance sheets by raising borrower standards. "Generally, we are looking at credit qualifications a lot more closely than in the past," said Edward Jamison, chairman and CEO of Community Bancorp, the holding company for Community Bank of Nevada. The bank's output dropped to 17 loans for $3.3 million this year compared to 28 loans for $6.5 million in fiscal 2007.

A critical change is banks are requiring a borrower to have a longer resume in a particular type of business, said Len Krick, managing member of United Business Brokers. "Experience is often the swing factor in whether or not the loan is granted," he said.

Some banks have dropped out of entire sectors. Roman said California Bank & Trust, a unit of Zions Bancorp, recently informed her that they would quit granting loans for food-related businesses or startups of any kind unless the full amount is covered by real estate collateral. With property prices continuing to drop, that has become a higher hurdle to clear.

The new SBA procedures manual, which went into effect Aug. 1, has contributed to lender hesitance, according to several experts. "We went out of our way not to do any major policy changes," said Hedgespeth. In doing so, the SBA more tightly defined its acceptable practices, reducing the wiggle room banks previously had in granting loans.

"Wells Fargo has always erred on the conservative side," said Kaneda. "We haven't changed our credit guidelines significantly in eight or nine years."

But others note that banks have changed their stances in order to hew to the new standards.

In addition, the guidelines contain some technical changes that could upset loan approvals. For example, the SBA now requires outside appraisals on large loans for equipment purchases. Krick said that the long-standing practice has been to place a high value on machinery so a borrower could take advantage of the tax breaks that come with high levels of depreciation. But if the loan went sour, the lenders would be stuck with collateral worth much less than the stated amount.

In the 504 program, the SBA now requires borrowers to put up 15 percent equity instead of 10 percent to try to stem the agency's losses. Banks will still kick in half of a loan, but the amount contributed by community development corporations, backed by SBA-issued bonds that have been the source of the losses, will drop from 40 percent to 35 percent.

At the same time, many businesses have gone into the hunker down mode, keeping as little debt as possible. For real estate purchases, others are holding off due to concerns that values have not yet hit bottom.

"I don't think business owners are looking to take on a lot of debt until this economy turns around," said Dennis Wengert, the SBA's deputy district director.

In the coming year, many do not expect to see much of an uptick. Even a relative optimist like Jamison couches his outlook with caution. "This thing (weak economy) has gone on for quite a while now," he said. "I anticipate changes, improvement. But have I been surprised so far? Yes."

Contact reporter Tim O'Reiley at toreiley@lvbusinesspress.com or 702-387-5290.

BORROWING FROM THE SBA

The Small Business Administration has two basic loan programs. The 7(a) loans, covering basic business needs, are what people most commonly associate with the SBA and typically account for more than 80 percent of loans granted each year in Nevada.

THE 7(A) PROGRAM

Sources: Commercial banks both willing to write and service loans to SBA standards.

Uses: A wide range, including buying inventory, paying down other debt, acquiring another company, startup expenses or general working capital. Quite often they are used to purchase franchises. Of note in Nevada, loans are banned to casinos or other businesses involved with gambling.

Amount: Maximum of $2 million. The SBA guarantees 75 percent of a loan for more than $150,000 to protect banks against losses and 85 percent for loans smaller than that. Loans granted under the SBA Express are 50 percent government guaranteed at a maximum $350,000.

Equity contribution: At least 30 percent for startups, 20 percent for franchises and existing businesses, 10 percent for professional practices and real estate. Occasionally, 100 percent financing is available. Owners of more than 20 percent of a company must give personal guarantees to repay a loan.

Terms: Generally seven years for working capital, 10 years for fixed assets and 25 years for buying or constructing a building.

Rates: For loans larger than $50,000, interest is capped at prime plus 2.25 percent for maturities of less than seven years, and prime plus 2.75 percent for longer terms.

THE 504 PROGRAM

Sources: Banks and community development corporations.

Uses: Purchase of hard assets, particularly real estate and buildings.

Amount: Generally a maximum $4 million

Equity contribution: 15 percent under new rules implemented Aug. 1. A bank will lend 50 percent as a first mortgage and a community development corporation will lend 35 percent as the second, the latter backed by debentures with a 100 percent SBA guarantee. As a transition, the SBA is still approving some loans at the old 10 percent equity level.

Terms: 10 to 20 years.

Rates: Variable, pegged to a rate higher than the five- and 10-year. Current rates are about 6.5-6.6 percent.

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