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November 23, 2017

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SBA loans nosedive as economy languishes

Federally backed small-business loans have dropped more than 50 percent in the past two years, a symptom of the receding economy, experts said.

The most recent fiscal year, which ended Sept. 30, was even worse than the prior year.

In fiscal 2007, which ended Sept. 30, 2007, the total of small-business loans made to Nevada companies under the Small Business Administration’s two leading loan programs peaked at $277 million, a number which dropped by 24.4 percent to $209.3 million in fiscal 2008.

That number dropped by an eye-popping 44 percent to $117.3 million during the most recent fiscal year.

“In absolute numbers, it’s a terrible year,” said Bob Cushman, a small-business counselor with SCORE — formerly the Service Corps of Retired Executives — a volunteer organization affiliated with the Small Business Administration.

The SBA works with commercial banks to offer loans to small businesses and entrepreneurs looking for start-up funds or capital to expand, buy building or equipment, but it does not offer loans or promise their availability.

The SBA offers two main loans, the 7(a) and the 504. The 7(a) loan program is geared toward start-up and existing small businesses, and is considered the most basic, flexible and used loan program.

The 504 loan program is a longer-term loan that helps businesses with “brick-and-mortar” financing.

The number of 7(a) loans being issued took a greater percentage hit than 504 loans, according to the SBA.

From 2008 to 2009, banks issued 53.5 percent fewer 7(a) loans in Nevada, from 622 to 289 loans. The disparity is greater when the comparison is drawn between 2007, when the economy peaked, to 2009, as the economy continued to slide deeper into recession.

During the two-year period the number of 7(a) loans issued dropped 71.6 percent, from 1,019 to 289 loans.

This, in turn, caused loan values to plummet. Year-over-year, 7(a) loans dropped 36 percent, from $119 million to $76.1 million.

Over the two year span from 2007 to 2009, 7(a) loan values fell 52.7 percent, from $160.8 million to $76.1 million.

Between 2005 to 2007, the number of loans and their values remained fairly stable.

The drop in 504 loans issued and their overall value also reflected the downward trend.

From 2008 to 2009, there were 50 percent fewer loans issued, from 136 to 68. The drop is even bigger from 2007 to 2009, when issued loans fell 63.2 percent, from 185 percent to 68 loans.

The big declines are also reflected in 504 loan values.

Year-over-year, loan values dropped 54.4 percent in fiscal 2009, from $90.3 million in 2008 to $41.2 million. From 2007 to 2009, loan values dropped 63.2 percent, from $116.2 million in fiscal 2007 to $41.2 million.

“There’s frustration in the business community, particularly for small businesses that need to access credit to sustain their business or expand their business,” Las Vegas Chamber of Commerce spokeswoman Cara Roberts said.

Banks are being more careful and requiring more information from prospective borrowers than they did three or four years ago.

For the past year, the chamber has invited SCORE volunteers to advise chamber members on how to survive and better prepare when they apply for loans.

If there’s a silver lining to all this, Roberts said, it’s that businesses and entrepreneurs who go through the rigorous process of securing an SBA loan will come out improved.

“You’re going to walk away with a much stronger foundation because you would have thought out those things,” she said.

The government itself doesn’t issue the loans, rather commercial banks and some other lenders offer the loans. The government backs up the loans with a guarantee — usually 75 percent but recently increased to 90 percent as a way to stimulate lending as a stimulus response to the recession — and banks are responsible for collecting on the loans, even if the borrower defaults.

If a portion of the loan remains unpaid, the SBA’s loan guarantee covers the unpaid portion only. For instance, if a loan was made for $100,000 and half of it was repaid but the other half — $50,000 — went into default, the government would cover 90 percent of that defaulted amount, or $45,000.

Before the government will reimburse the portion it guaranteed, the bank has to collect whatever assets were listed as collateral for the loan. Only after the bank has exhausted its options in collecting on the loan will the SBA reimburse its guaranteed share.

Cushman said that although SBA loans were down significantly in 2009, the majority of the loans made during the year were during the second half of the fiscal year, between April and September.

When counseling small-business owners and entrepreneurs, Cushman has found that their interest in securing a loan is the highest it’s ever been.

He’s seeing more people coming into SCORE for counseling, particularly laid-off workers seeking to make money for themselves.

But those seeking loans today, more so than before, need a robust business plan, he said.

Several dynamics are working against Nevada businesspeople, especially high unemployment and foreclosure rates, declining home values and banks that were burned by the bursting of the real estate bubble, said Dennis Wengert, SBA deputy director in Nevada.

Three of the leading banks offering SBA loans have been shut down by regulators: Silver State Bank, Community Bank of Nevada and Great Basin Bank of Nevada. This, too, has affected loan availability to businesses and entrepreneurs, Wengert said.

“When those three disappeared, those options were no longer available,” he said.

Between existing business owners and entrepreneurs planning new businesses, the latter are having an even tougher time securing an SBA loan.

Bankers want to see a history of revenue growth and stable cash flow, even more so than collateral, and entrepreneurs new to the business don’t have that available.

During the economic boom, the majority of 7(a) loans were made to start-up companies, Wengert said.

“We’ll see a lot less funded, at least until the economy turns,” he said.

Small-business owners, on the other hand, may be able to prove their business is stable, even growing, but are often choosing not to seek a loan.

Wengert said prudent businesspeople will note that as the jobless rate increases, their customers’ spending decreases. This means they may not be able to repay the loan.

“Deep down they know they don’t have the wherewithal to repay the loan,” he said.

Wells Fargo Bank doesn’t sell its SBA loans on the secondary market, instead keeping and servicing the loans itself, said Dave Kaneda, SBA manager for Wells Fargo in Nevada, Utah, New Mexico and Arizona.

“This is one of our strengths,” he said. “We’re not necessarily pulling back.”

The bank has increased its 7(a) loans $2.6 million in Nevada, Kaneda said.

“We saw an opportunity to increase the number of loans,” he said, even hiring an additional sales person in Southern Nevada to compete.

One-third of those seeking SBA loans are start-up businesses or less than 2-years-old, he said. The rest are existing businesses looking to expand, buy another business or purchase a building, he said.

If a small business — or any borrower — defaults on a loan, that reflects poorly on the bank’s loan portfolio and could result in poor reviews of the bank by regulators.

Even with the SBA loan guarantee, the bad loans count against a lender’s loan ratios, in turn affecting a bank’s capital and loan loss reserves.

During the first half of the fiscal year, credit was restricted and lending standards raised, so only the best performing businesses were being offered loans, he said. As the secondary market returned and started buying bundles of SBA loans from banks, along with initiatives by the Obama Administration, banks started feeling a little breathing room, he said.

This has resulted in some return in loan volume — the majority of loans made from Oct. 1, 2008 to Sept. 30 were made in the second half of the year, he said.

“If you can hang on a little longer, the economy will turn,” Wengert said. “The light at the end of the tunnel is hope. It’s not a freight train heading toward us.”

In his weekly address to the nation, President Barack Obama said the government will be pushing for more credit to be made available to community banks so they in turn can lend to small businesses.

“Too many small business owners are still struggling to get the credit they need,” Obama said. “These are the very taxpayers who stood by America’s banks in a crisis, and now it’s time for our banks to stand by creditworthy small businesses, and make the loans they need to open their doors, grow their operations and create new jobs.

“It’s time for those banks to fulfill their responsibility to help ensure a wider recovery, a more secure system, and more broadly shared prosperity. And we’re going to take every appropriate step to encourage them to meet those responsibilities.”

Small community banks have restricted their lending more so than larger banks that may have benefitted from the bank bailout bill last year.

Desert Community Bank pulled back its lending immensely in the past year, issuing just two SBA loans for a total of $100,000. The previous year it gave out nine loans totalling $1.6 million, according to In Business Las Vegas’ 2009 Book of Business Lists.

Jerry Buttaccio, chief credit officer for Desert Community Bank, said that although the 90 percent loan guarantee increase helps somewhat, the reason for the bank’s drop in SBA loan issuances is because of Desert’s capital constraints.

“We’re lending hardly any money right now,” he said. “We have to keep a certain ratio (of loans-to-capital).”

Even if Desert had more capital available, Buttaccio is doubtful his bank would increase its lending. These days, businesses have a higher threshold to prove their credit-worthiness, and with sales down and dwindling profits, it’s been difficult since late 2007 or early 2008 to qualify their loans, he said.

“Big banks don’t have the same problems community banks have,” he said. “A bank our size never even saw a portion of the stimulus.”

Companies’ collateral — once the standard loan back-up, is not as viable as real estate values have plummeted, he said.

“Even if you have the money, you can’t loan out if you want to be prudent,” he said.

It’s imperative that small businesses are given the opportunity to grow, because it’s that facet of the economy that drives most job creation — something lagging in Las Vegas’ economy, Roberts said. In September, the Las Vegas jobless rate was 13.9 percent.

“There’s a certain amount of risk when you lend to a small business, but in a bigger picture, that is what it’s going to take to rebuild our economy,” she said.

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