WEST MICHIGAN — Even without an option that boosted volumes the prior two years, lending backed by the U.S. Small Business Administration remained strong during the first two months of the 2013 fiscal year.
Experts in the field say the health of SBA lending in the region is a sign of its better economic conditions.
Where two years ago a majority of SBA-backed loans went to small businesses refinancing existing debt, more loans today are going to business expansions and startups.
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“We’re seeing a good mix of everything now,” said Brian Picarazzi, senior area manager for the SBA’s Western Michigan office in Grand Rapids.
“It’s been a nice change of pace,” Picarazzi said. “We seem like we have more businesses looking for money” to expand.
Through November, SBA-backed lending overall in Michigan was down slightly from the first two months of the prior fiscal year in dollar value but increased in volume.
Banks in Michigan made 298 loans for $60.7 million in October and November under the SBA’s primary 7(a) lending program that guarantees 85 percent of the loan up to $150,000 and 75 percent for loans of $151,000 and above. That compares to 275 loans for $72.8 million during the same period a year earlier under 7(a).
Lending under the SBA’s 504 program totaled $26.3 million through 48 loans, compared to 39 loans for $16.2 million during October and November a year earlier. SBA 504 loans require the borrower to put up 10 percent of the funds they need. A bank provides 50 percent of the loan request and the remaining 40 percent comes from the SBA.
Lending volumes held up early in FY 2013 even as borrowers were no longer able to use SBA lending programs to finance existing debt. That authority expired in late September and Congress has yet to renew it.
The ability to refinance existing debt for better terms drove SBA lending coming out of the recession. As the economy got better over the past two years, more borrowers are seeking credit to finance growth.
“The landscape has shifted. We’re seeing loans requests for good reasons,” Picarazzi said.
Experts in the field say SBA lending holds benefits for both the borrower and banks involved in the 7(a) and 504 programs.
Using an SBA program allows borrowers to obtain better terms.
“They can usually get more money for a longer period if the SBA is involved,” said Eric Seifert, a finance and strategy specialist with the Michigan Small Business & Technology Development Center who helps small businesses secure financing.
A small business can get a 7(a) loan for up to 25 years. The SBA resets the interest rate after a period, but the loans do not come with balloon payments.
SBA 7(a) loans typically go for a special purpose such as expanding into exporting, or for an acquisition, starting a new business or expanding an existing business.
504 loans are typically used for capital projects or acquiring fixed assets. The loans can go for as long as 20 years and are written at a fixed interest rate.
Right now, 504 loans have an interest rate of 4.01 percent for a 20-year loan and 3.51 percent for a 10-year loan, said Sandra Bloem, president and executive director of the Economic Development Foundation in Grand Rapids.
“The rates have been extremely attractive. Within the last year, they keep ratcheting down,” said Bloem, who expects rates to stay low for a while.
“As long as something doesn’t change, we’ll probably see rates around there for six months. But you just don’t know what’s going to happen,” Bloem said.
504 loans are processed through so-called certified development corporations such as the Economic Development Foundation, Lakeshore 504 in Holland, Grand Haven and Muskegon, and the Lansing-based Michigan Certified Development Corp.
For bankers, lending through the SBA can mitigate risk through the guarantees the agency puts on the loans.
The ability to mitigate risk brought many more banks into SBA lending during the recession. In the 2007 fiscal year, 92 banks and credit unions in Michigan had at least one SBA loan. By FY 2012, the program’s ranks had grown to 119 lending institutions, Picarazzi said.
The SBA guarantee allows banks to make loans where they may see too much risk to do on their own.
“That allows capital to hit the street that otherwise may not, with a little more comfort level in the bank,” Picarazzi said.
But that doesn’t mean that loans made under SBA programs are necessarily marginal. In many cases, borrowers are startup companies that lack adequate collateral to secure a loan or the owners may not have the track record that the bank prefers to see, Picarazzi said. The recession also hurt the ability of many growing companies to land a loan because decreased property valuations lessened their ability to put up real estate as full collateral, he said.
Or a company may be in an industry where banks have sought to minimize their exposure or in a volatile or higher-risk sector such as restaurants.
In those kinds of situations, banks have been referring clients to SBA programs, Picarazzi said.
“The perception out there is that it (SBA lending) is for companies that are failing and can’t get anything else. That’s not the case,” he said. “It is not an indication that a company is weak.”
For startup business, many banks “absolutely require” SBA involvement in a loan because of the risk, Seifert said.
“They are really looking to mitigate their risk, and the SBA is an easy alternative,” Seifert said.
Still, some banks continue to shy away from using SBA lending programs because they see them as too bureaucratic.
That often leaves smaller banks that lack depth and expertise staying out of SBA lending, he said. The SBA guidebook of standard operating procedures is 800 pages and “can be kind of agonizing,” Seifert said.
“If you don’t have someone who does SBA all the time, it can be time-consuming and difficult,” he said.
The Michigan Small Business & Technology Development Center does offer assistance to small businesses in filling out loan applications, and the Economic Development Foundation last year began offering assistance to small banks to process paperwork and handle loan closings for 7(a) loans.
The service extends the organization’s expertise in processing 504 loans into the 7(a) program.
“We work with SBA forms all the time,” Bloem said.
Small businesses considering applying for an SBA-backed loan should first make sure their bank participates in the lending programs, Picarazzi said. If not, he advises them to look around and use a bank that “does a lot of SBA loans” and is well acquainted with the process.
“Do a little research,” Picarazzi said. “You want to make sure you’re talking to a bank with some experience” in SBA lending.
In the prior 2012 fiscal year in Michigan, lending under the SBA’s primary 7(a) program declined but increased under the 504 program. The SBA backed 1,742 loans under 7(a) during FY 2012, totaling $551.2 million, which compares to 2,303 loans for $689.4 million in FY 2011.
Loans made under the 504 program increased to 333 for $177.9 million in FY 2012, which compares to 240 loans for $108.9 million in the prior fiscal year.