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| September 24, 2008 |
By: Wayne Tompkins |
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ohn Dunn has been on the road lately, visiting banks across the state for the U.S. Small Business Administration. These days, even the venerable federal agency is having trouble getting banks to make its loans.
The 17-year agency veteran had been dispatched to change their minds.
“It’s because the banks are backing away from doing lending, even if it’s SBA-backed,” said Dunn, the agency’s Miami-based assistant district director for lender relations. “Our volume has grown tremendously over the last decade, just this year our volume is down because of what’s going on.”
Dunn, who addressed a group of about 80 lenders in Fort Lauderdale on Friday as part of his road show, is reminding banks that the SBA’s package of guaranteed and risk-mitigating loans provides a lifeline for banks to keep lending in difficult times. That includes its 7(a) loan, its most popular and basic product.
The SBA’s own figures show that between October 2007 and August of this year, compared to the same period the previous year, its combined 7(a) loans in Miami-Dade, Broward and Palm Beach counties plunged 43 percent in volume to 1,339, and 21.6 percent by dollar value, to just under $220 million. Bank of America, for example, has reduced its SBA 7(a) loans to 423 from 1,092 the year before, and to $18.1 million from $39 million in 2007 — when it made $24.2 million in such loans in Miami-Dade County alone.
The big drop comes as banks raise the bar for SBA-backed loans along with their other loan products.
“The message I’m putting out to the lenders group is that the SBA has not changed its credit criteria. We have no credit crunch. We have not tightened,” Dunn said. “The way I bring it home to the banks is I tell them, we can help you if you’re risk averse in this market. We can mitigate your risk by the guarantee, or by letting you do a real estate loan and only being in there for 50 percent of the value.”
While banks are the current focus of his efforts, Dunn’s true constituency is the nation’s estimated 25 million small businesses, many of which are struggling to find loans for start-ups, expansions, equipment and real estate purchases. Small businesses can not get loans directly from the SBA (except for disaster relief), but must work through banks offering the agency’s lending programs.
“I’m visiting small community banks that don’t deal with us and selling our programs,” Dunn said. “My district director, my boss, wants us to be relentless in telling the banks we’re available. My three largest lenders were Bank of America, Washington Mutual and Capital One, and they’ve all backed away.”
Richard Donato, a Hollywood attorney and member of the South Florida SBA Lenders Group, which held Friday’s presentation, said that other challenges include the false perception that loans are available only for minority-owned businesses or as a loan of last resort.
Donato, who described the group as a “loose association” of lenders and business development officers that specialize in making SBA loans, said that, “There’s an old misconception that you had to be turned down by two conventional lenders in order to qualify. That may have been true decades ago, but it’s not the case any more.”
Not every bank chooses to participate in the SBA’s programs, noting that their own and other small business loan products are available, often on more favorable terms.
T.L. Brown, director of marketing for Great Florida Bank, said that while the bank has done a limited amount of SBA lending, the bank does not have the certification to do many types of agency loans.
“We just haven’t gone through the certification at this point,” Brown said. “You really have to have somebody on staff that is really familiar with all of the SBA requirements. Being government driven, it’s quite a process. Often times, we’ve had better terms than the SBA’s loans.”
Brown said a number of other borrowing options remain for new and expanding small businesses.
“For equipment, there are a lot of equipment leasing firms that have desirable terms out there, even for small businesses or start-ups,” Brown said.
However, Fort Lauderdale-based BankAtlantic, which sent six representatives to Friday’s meeting, is in the process of rolling out its “SBA Express” product, a sub program of 7(a) that allows loans up to $350,000, offers revolving lines of credit as well as term loans, and requires very little SBA documentation — meaning the customer can get money faster.
“We’re going to start promoting it later in the year,” BankAtlantic chief executive Jarett Levan said. “We kind of anticipated where the market was headed and knew that adding additional functionality to our SBA program was beneficial to the marketplace.”
Dunn said the encouraging sign is that the number of participating banks is increasing because, while lending at the large banks is down, “the little banks are coming to us in record numbers. The community banks are saying to us, ‘We don’t have exposure to the real estate market (and its non-performing loans), but we want to work with the SBA anyway.’ ”
Dunn said the SBA is willing to be a subordinate lender or the guarantor of the loan.
“If we do a ‘504’ loan, we help preserve the lender’s capital,” he said.
The basic premise of a 504 is 10 percent down financing for business property — for example, if a small business wants to buy a small plot of land to own instead of lease.
“This is not investment property,” Dunn said. “It turns out to be a 50/40/10 program. The bank does 50 percent, the SBA — through a certified development company — does 40 percent, and the borrower puts up 10 percent. So it’s 10 percent financing and the SBA takes a junior lien. We let the bank take a first mortgage at only 50 percent of the value of the property. It’s exceedingly difficult for the bank to lose money.”
But the real benefit is that the bank, in a $2 million deal, only needs to put out $1 million. The SBA will come to the table with $800,000 and the borrower puts up $200,000.
“So we help the bank preserve its capital, and we mitigate risk,” he said.
Donato said the purpose of the SBA is to make loans where commercial lenders are not making loans.
“The recovery has to start somewhere,” he said. “It’s going to take a lot of things. It’s only one step, but making financing available to small business is very critical.”
Along the way, Dunn said there have been signs that his message is getting through.
The Fort Lauderdale seminar he addressed drew about 80 people. In the past, he said, such gatherings usually attracted only a couple of dozen.
“So yeah, I’m a little fired up,” he said. “If [80] bankers are there and I convince 10 to do more, I’ve done my deal. We want to get the message to bankers that don’t do business with us: Why not?”
Wayne Tompkins can be reached at wayne.tompkins@incisivemedia.com or at (305) 347-6645.
John Dunn photo by Melanie Bell
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