It took four months and hefty legwork for Robert Adams to secure a $2 million small business loan to purchase his first business, Midtown Manor. Adams is not alone—more than 2,000 applicants waited for SBA (Small Business Administration) loans last year. However, the lending game has changed.
Utah’s Lending Ups and Downs
Prior to Adams’ loan application in early 2009, the lending climate had become somewhat dismal. Mirroring the national economic downturn, Utah’s small business lending slowed significantly in October 2008 and remained sparse until the federal stimulus package (American Recovery and Reinvestment Act) took effect in mid-February, according to Lori Chillingworth, senior vice president of business banking at Zions Bank.
“You just had too much of the unknown for everybody. The borrowers, the small businesses—no one knew for sure what to do. Everything just kind of came to a—I wouldn’t say screeching halt—but a pretty dead crawl,” she says.
Fortunately, for Utah’s struggling small business owners, the financing faucet slowly turned in the other direction. By early September 2009, the SBA Utah District Office made more than 2,000 loans totaling approximately $270 million, according to Steve Price, deputy director of the SBA Utah District Office.
“We’re off about a third from last year, but we’re leading the nation as far as loans in an SBA district office,” he says.
Chillingworth attributes the initial, October-to-February lending slowdown to two factors: businesses’ reluctance to borrow additional money as a way of hunkering down to weather the recession and the banks’ tightening of funds in reaction to the credit crunch. However, once February hit, another shift in mindset set the lending process in motion. For borrowers, it wasn’t just an issue of putting off growth plans or equipment purchases, it became a matter of surviving a longer-than-anticipated economic downturn, Chillingworth explains.
“On the lenders’ side, we said, ‘we do have money to lend and we want to make sure we’re getting it out to businesses that need it,’” she says. As of September 2009, Zions’ loan volume had nearly reached summer of 2008 levels.
Picks and Processes
According to Price and Chillingworth, the most popular type of small business loan is the SBA 7(a) of which the SBA Express and ARC loans are subsets. Borrowers secure SBA loans through a lender and the SBA (a federal government entity) acts as the guarantor. The 7(a) loan, which has a maximum of $2 million, can be used for a variety of purposes—from working capital to debt refinancing. It is designed to help viable small businesses obtain financing when other sources of lending are unavailable; however, businesses do not have to be declined for a regular loan in order to apply for an SBA loan.
With the help of a Wells Fargo loan officer, Adams secured an SBA 7(a) loan. Because his application coincided with the enactment of America’s Recovery Act, he saved $55,000 in origination fees and the loan covered 90 percent of the appraisal value instead of the traditional 75 percent.
“That made all the difference in the world for me,” says Adams. “It’s easier to come up with 10 percent down than it is to come up with 25 percent.”
In addition to waiving fees associated with SBA loans, the stimulus plan also increased the guarantee on most SBA loans from 80 percent to 90 percent, giving lenders a greater comfort level, says Chillingworth.
Under the 7(a) category, the SBA Express loan has a maximum of $350,000 and is available online. According to Price, the express loan is popular with banks because it is a speedier process with less paperwork than the regular 7(a).
For businesses in need of a smaller chunk of change to get them through the crunch, the ARC (America’s Recovery Capital) loan is an interest-free, deferred payment loan of up to $35,000 for viable businesses in need of short-term assistance. ARC funds are available until September of 2010 or until the federal funds run out.
Another federally backed product, the SBA 504 loan, which is primarily for commercial real estate financing, comes in at a distant second to the SBA 7(a) in terms of volume. Chillingworth attributes the lack of increase in 504 loans to uncertainty in the residential and commercial real estate markets.
A Dash of Luck
Though the purse strings have loosened a bit since the last quarter of 2008, not everyone is cashing in on small business loans.
“Small businesses are receiving loans, but there’s no method to whether or not a small business receives them. We cannot figure out a trend,” says Candace Daly of the Utah chapter of the National Federation of Independent Business, which represents approximately 4,000 businesses.
What Daly can predict about the current small business lending climate is that it’s detailed and it’s going to take time. ARC loans in particular require a great deal of paperwork. As Chillingworth says, “It does take time. It does take a lot of preparedness and it does take a lot of communication with your lender.”
Adams concurs that the loan process, while smooth for him, takes a chunk of time and work to complete. “With the SBA, they want everything except your first born. There’s tons of paperwork, but it’s worth it,” he says.
Back to Basics
Successful loan applications begin with solid business plans that take into account the changing economic climate, according to Price and Chillingworth. With nearly half of the nation’s economy driven by small business, it’s vital that these flexible, adaptable GDP-earning engines keep chugging.
For starters, Daly suggests that small business loan applicants work with more than one financial institution at a time. That way, if one application falls through, the applicant won’t have to start the entire process from scratch. She also encourages her members to have all of their financial information prepared in advance of meeting with a lender and seeking out institutions that support SBA loans.
Price and Chillingworth stress the need for a revamped business plan, taking into account changing markets, consumer power and new projections, based on potential cuts in revenue. By reworking projections as well as gathering up actual numbers regarding past performance, a small business owner is armed with enough history and good information to convince a loan officer that his or her business model will work.
As Price puts it, “Access to capital is alive and well. It’s a little tighter than it has been in years past, but if [applicants] have a viable business plan, I think they can find financing for what they want to do.”