Â By Rob Garver
Of the nearly 8,000 banks in the United States, less than half participate in the Small Business Administration’s lending programs, and the vast majority of those participate in only the most limited sense.
In 2009, for instance, the SBA reported that 2,600 banks participated in its 7(a) program for general small business loans. But the average number of loans made by those banks was only 17, and that number was seriously skewed. Hundreds of participants made only one SBA loan, and the vast majority made fewer than 10.
But recent changes to the law-which were overshadowed by the Obama administration’s announcement of a $30 billion small-business loan fund through community banks-may make SBA lending more attractive to bankers, industry observers say. The modifications may mean current SBA lenders may find incentive to participate at higher levels, and banks that previously viewed instituting an SBA lending program as more trouble than it was worth may want to reconsider.
“As the lending environment is becoming more competitive, banks are going to look at adding SBA lending to their portfolio of business,” says Paul Merski, senior vice president and chief economist at the Independent Community Bankers of America. “The enhancements to the SBA program are going to make it more attractive to get banks involved in the program.”
The shift in SBA policy is a result of the 2010 Small Business Jobs Act, passed in September, which was meant to spur hiring by allowing small companies the funding they need to expand operations.
The SBA last month announced that as a result of the act it had increased the size of the loans available under several of its programs from $2 million to $5 million. The increase includes loans made under its 7(a) program for general small business loans and its 504 program, which covers fixed-asset loans.
The agency also reduced the fees it charges lenders and increased the level of guarantee it offers, creating further incentives to spur participation. It has also budgeted for an outreach program aimed at bringing more community banks into the SBA system.
SBA Administrator Karen Mills says the larger loan sizes are there to help small-business owners grow and create jobs. Whether through a start-up micro loan or a real estate loan to take advantage of low interest rates and commercial property prices, “SBA loans can now be an even greater resource to help entrepreneurs and small business owners get the capital they need,” Mills says.
The changes-particularly the elimination of the guarantee fee-have had immediate results, say some bankers.
“It has helped us out a lot,” says Robert A. Catanzaro, president of Independence Bank, in East Greenwich R.I. Catanzaro said that Independence, a privately held bank with $70 million of assets, has already seen small business loans in its pipeline increase as a result of the guarantee fee being eliminated.
He says that the guarantee fee, which could run to as much as $26,000 for a $1 million loan, was a real impediment to small borrowers, and cut them off from what was sometimes their only source of credit.
“For small businesses there are generally not a lot of other options they have for financing at this time,” Catanzaro says. “Small businesses in general rely on bank loans and the SBA program is one of the best and sometimes the only option for the small business.”
The changes at the SBA come as many banks are beginning to see small business lending as an area primed for growth.
In October, Bank of America announced plans to hire 1,000 additional small-business bankers by 2012. Once among the nation’s top small business lenders, BofA drastically cut loans to small firms during the financial crisis, barely cracking the top 100 in 7(a) loan volume last year. In addition to relaxing the limits on loan size and reducing fees, the government has also taken steps to make additional capital available to lenders.
At the same time the SBA announced its changes, the Treasury Department announced that it had allocated $1.5 billion in funding to the State Small Business Credit Initiative, under which states partner with local lenders to extend credit to small businesses. The program requires the states to show that every dollar in federal funding received resulted in $10 in private lending.
This fall, the Obama administration announced that a pool of $30 billion in low-cost capital would be made available to banks that agree to use it to increase their small business lending. Banks with $10 billion or less of assets can apply for capital from the fund, paying an initial 5 percent dividend that could be reduced to as little as 1 percent if the banks increases its small business lending above certain thresholds.
“If it counts as Tier 1 capital, we would definitely make an application to that program,” says Catanzaro, of Independence Bank.
Tapping the $30 billion capital pool may be especially attractive to banks that accepted money through the Treasury Department’s Troubled Asset Relief Program. Certain TARP recipients are eligible to refinance their TARP funds-on which they otherwise could pay as much as 9 percent interest by 2013.
Charles Wendel, president of Financial Institutions Consulting, says that the fund may also be attractive to community banks because regulators are pressing them to increase their capital levels at the same time that it has become increasingly difficult for them to tap additional capital through markets or existing shareholders.
To be sure, the government’s efforts have met with some criticism. Many bankers, feeling burned by the perceived demonization of institutions that accepted TARP money, are balking at the prospect of taking more funds from a government program.
And there are additional questions as to the ability of such a program to generate demand. The elimination of the guarantee fee and the increase in the loan limits are expected to have a positive effect on the number of borrowers seeking loans, but it is unclear at this point whether that will be enough to overcome other factors keeping demand down.
“Commercial borrowers, despite healthy balance sheets, seem to have adjusted to working leaner and remain reluctant to expand or borrow in the face of such vast economic and political uncertainty,” wrote R. Scott Seifers, managing director with Sandler O’Neill & Partners, in a research note. “And even though many banks note their healthy commercial pipelines, only a fraction of that seems to be translating into new loans.”
But Merski of the ICBA says he is confident that as more banks get interested in lending to small businesses, competition will lead to better terms and greater demand, which will in turn drive more banks to offer SBA loans.
“Going forward, the changes in the program that have made them more robust and more attractive are going to have more and more bankers get into the SBA lending programs,” he says.