Tightening credit terms for small businesses are affecting even one source that is supposed to function as a lender of last resort in down cycles ”“ the Small Business Administration”™s guaranteed loan programs.
In New York and nationally, loans are down significantly this year for the SBA”™s two primary loan programs: the 7(a) program that guarantees up to 85 percent of working-capital loans doled out by banks and the 504 program that guarantees loans for larger asset purchases such as real estate or machinery.
A drop in SBA guarantees might have a particular impact in a few industries. According to New Jersey”™s SBA office, restaurants land double the number of SBA loans of the next closest industry, hair and nail salons. Small businesses requiring major upfront equipment costs such as dental clinics, fitness gyms and mechanics also rely on such loans.
JPMorgan Chase led the New York City region in SBA lending last year, issuing nearly 1,900 loans for a combined $80 million. That was more than twice the level of Charlotte, N.C.-based Bank of America Corp.
In all, the New York district office arranged guarantees for 6,000 loans totaling $620 million, the fifth consecutive year SBA lending increased in the region. In the current fiscal year, however, SBA lending is off about 20 percent from the same level last year, with Bank of America”™s SBA loans off 40 percent.
SBA loan figures are dropping despite the agency”™s effort to streamline its loan process, cutting its standard-operating procedure manual for bankers from 1,000 pages to 400. Bankers apparently are still having a difficult time implementing the changes; in April the SBA agreed to extend by six weeks a deadline for banks to comply with the newly streamlined procedures.
The apparent tightening of SBA lending is in line with general credit conditions. In an April survey of senior bank loan officers, the Federal Reserve Bank found that half of banks reported tightening loan requirements, up from 30 percent in a January poll, though just 4 percent indicated they had tightened loans “considerably” to small businesses.
In a separate survey, the New York Fed reported an “across the board” increase in delinquencies as of mid-April, which are at their highest level in more than a decade.
In the past two years, 370 banks have dropped out of SBA lending programs altogether, according to Marilyn Landis, chair of the Washington, D.C.-based National Small Business Association.
Landis blames the trend in part on an increase in fees to the statutory limit for the 7(a) programs. Massachusetts Sen. John Kerry, who heads the U.S. Senate Committee on Small Business and Entrepreneurship, reiterated in early May a request to temporarily lower the fees paid on SBA loans, a measure that would cost $200 million.
“The current capital vacuum has created a new predicament for small-business owners ”“ use credit cards or (go) bust,” Landis said. “Many small-business owners first turned to credit cards as their primary source of working capital in the early years of this decade, when a multitude of banks last tightened their lending standards.”
For business owners seeking optimism, there was cause for some in a recent report ”“ the April installment of the Fed”™s Empire State Manufacturing Survey reversed two months of pessimism, as manufacturers reported sharp improvements in business conditions and did not indicate plans for widespread layoffs.
