September 17, 2009
By Diana Ransom
SMALL-BUSINESS LOANS are up at many of the nation’s lenders, but business isn’t exactly humming, and growing apprehension about commercial lending could leave a substantial number of firms without a source of capital.
The recent increase in lending has been clear. JPMorgan Chase (JPM), the parent company of Chase Bank and Washington Mutual, said it issued about $1.5 billion in loans to 4,177 small businesses with revenues up to $10 million during the second quarter, up 32% over the first quarter. Over the same period, Regions Financial (RF) said it issued or renewed $2 billion in loan commitments to small-business clients, a 31% hike over the first quarter.
Further, the country’s top 22 banks receiving capital injections from the U.S. government collectively reported more of the same. Although the total outstanding balance of small-business loans fell 1% in June, the total number of small-business loan originations surged 26% over a month earlier, according to the Treasury’s latest monthly bank lending survey.
Some lenders are newly bullish about issuing loans to small businesses because of a slight uptick in demand and the apparent success of the Small Business Administration’s move to lift its flagship 7(a) loan guarantee to 90%, up from 75% or 85%.
“The SBA programs help you out with newer businesses or businesses that don’t have a lot of collateral,” says Maria C. Coyne, executive vice president of KeyBank (KEY) who also noted an increase in demand for loans.
Still, lending isn’t what it used to be. “In terms of our [current] lending pipeline, what we’re seeing now in lending demand is 60% of what we’d expect in a normal lending environment,” says John Asbury, the executive vice president of business services at Regions Financial. That’s up from loan levels of less than 50%, which the bank logged in December of last year. But it’s hardly back to normal, he says.
Firms holding their expansion plans in check may have a good reason, says Bob Coleman, a small business banking analyst in La Canada, Calif. “We’re still in a recession,” he says. “We’re not talking Armageddon here, but it will [likely] remain tough for businesses to get loans,” says Coleman.
The root of the problem is a lack of solid private backing for small-business loans. One example is the disparate markets for the two components of 504 loans, which business owners use to purchase real estate and equipment. Although the secondary market for 504 debentures (the 40% stake of each of these loans that is guaranteed by the government) is flowing relatively freely, there is no secondary market for 504 first mortgages (the 50% stake made by private lenders), Coleman says. In the American Recovery and Reinvestment Act (ARRA), the SBA was instructed to take steps that would establish a secondary market for these first mortgages, says Jonathan Swain, a SBA spokesman. “We are currently in the process of finalizing the regulations for that piece of the Recovery Act,” he says.
Still, Coleman insists that the SBA is dragging its feet. Through the program, the Treasury would purchase mortgages if no other buyers step forward. Assurance of a buyer might drive banks to continue issuing 504 loans. Without that guarantee, banks could remain wary about issuing such loans, as many analysts expect the market for commercial loans to be the next shoe to drop, he says. Already, there are about $135 billion in defaulted commercial mortgages, a figure that has more than doubled since the beginning of the year, according to Real Capital Analytics, a firm that tracks commercial property sales.
Small-business advocates also worry about what will happen once the $375 million set aside by the SBA to temporarily eliminate loan fees and increase the agency’s loan guarantee to 90% for 7(a) and 504 loan programs runs out. SBA-backed loans are expected to revert to their pre-Recovery Act status by the end of November or December, according to the SBA.
In addition, lending terms are still tight. According to the Federal Reserve’s latest Senior Loan Officer Opinion Survey, 35% of domestic banks said they tightened credit for small firms in July, down slightly from more than 40% in April. And as many business owners have seen their credit scores slide, they’ve lost some of their ability to qualify for loans.
The steady stream of regional bank failures isn’t helping either. Since last September, 108 banks have shuttered, according to the Federal Deposit Insurance Corporation. Many other banks have been bought out. For borrowers, industry consolidation means that there are fewer lenders to approach for loans, which can limit a company’s ability to attract funding.
When PNC Financial Services Group (PNC) acquired National City Corp. last December, John Snyder, a senior business consultant at Gannon University’s Small Business Development Center in Erie, Pa., said his clients were left with few alternatives. “National City was always the biggest SBA lender in the area,” he says. “Now that they’ve mostly been absorbed by PNC, they aren’t [necessarily] willing to do SBA loans for start-ups,” Snyder says. (According to PNC spokeswoman Meghan Cole, the bank does lend to start-ups — under the right circumstances, such as to those with an experienced manager or owner.)
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