Local banks lending a hand to small business owners
By Janine Rojas
The owners of Oceanside’s popular Beach Break Café needed a break, and finally got one — through a Small Business Association-backed loan funded by Chase Bank and CDC Small Business Finance. The financing enabled the café to purchase and construct a new building twice the size of its former location.
“We’re seeing a revival. Our records show an uptake in SBA-backed loans,” said Ruben Garcia, district director of the Small Business Administration (SBA) San Diego District Office. In fiscal year 2010, area banks issued 606 SBA-backed loans totaling $228.6 million, a 28 percent increase over 2009. While a positive sign, the increase has not yet reached 2007 levels of $432 million, with 1,200-plus loans. But it is an indication that lending is moving in a positive direction, he stressed.
The SBA is a federal agency that offers government guarantees on bank-issued loans for small businesses. The primary SBA loan products are: 504 loans for long-term construction/equipment and/or machinery needs, 7(a) working capital loans, and microloans. The 504 loan is comprised of SBA-backed funding from a Certified Development Company (CDC) combined with a conventional bank loan. The 7(a) loans fund specific business needs and are issued by participating banks. The SBA is also rolling out a new initiative under the 7(a) program designed to assist underserved communities. It will provide higher guarantee levels and broader flexibility to certain lenders, as well as allow CDCs to participate.
Statewide, small business lending decreased by almost $1.5 million loans and $21 billion in financing from 2007 to 2009, per a report from the California Reinvestment Coalition (CRC). It focused on lending activity during the banking-meltdown-fueled financial crisis. Previously, small business lending was dominated by large banks, according to the study’s author, CRC Executive Director Alan Fisher.
Fisher and Garcia say the lending decrease corresponds to the tightening of lending restrictions by federal regulators, prompting lenders to approve fewer applicants. The drop was most dramatic among larger banks, said Fisher, as they lacked the flexibility to accommodate small business needs. In addition, owners used to rely on home equity lines of credit for capital, and that source dried up as well.
“These days, you have to be so squeaky clean to get a loan, only those who don’t need them can get them. It’s like the old saw where banks give you an umbrella on a sunny day,” lamented Fisher.
The lack of lending damages the economy as a whole, since small businesses create more jobs than any other industry, added Fisher.
Garcia concurred: “Small businesses depend on financing to make it through the recession and be successful. When owners are not able to get help from lenders, that can have a devastating affect” across the board.
As Fisher puts it, “Banks have the responsibility to make good loans.”
Chase Bank spokesman Gary Kishner couldn’t agree more. When Chase took over WaMu in 2008, Chase set its sights on augmenting small business lending. Locally, those efforts have resulted in Chase jumping to No. 2 on the SBA list of top 10 7(a) lenders in San Diego for fiscal year 2010, ranked by numbers of loans. Chase issued 64 loans, for a total of $6.1 million, a 478 percent increase over the previous year, reports Kishner. Wells Fargo Bank is No. 1, with 74 loans totaling $20.7 million.
“We think San Diego is a strong market. We continue to grow and expand by making investments in the area, particularly in the small business sector,” said Kishner, adding that Chase opened 11 new branches in San Diego in 2010.
Chase’s goal, Kishner says, is to continue to serve small businesses through responsible lending practices combined with increased services. These efforts have included creating a Loan for Hire program to reward small businesses for adding new employees; and Chase’s Second Look credit review process for businesses that have been turned down for a loan and seek further review.
“We scratch below the surface, looking beyond performance of the last two or three quarters. We understand everybody’s down, not necessarily because of bad business practices, but rather because of the economy. So we take all these things into consideration,” explained Kishner.
Such was the case with Chase loan applicants Gary and Zell Dwelley, the owners of Beach Break Café. Business has been booming at the Oceanside restaurant for 22 years. Yet when the owners wanted to move and expand, bank after bank turned them down for a loan, even though they were well qualified. The restaurant business was too risky these days, they were told – until they met a Chase representative who told them about SBA-backed loan products.
“Maybe if we were building a medical or dental office, the project would have been financed in a heart-beat. But no one wanted to touch restaurants. Then Chase came along and really went above and beyond, helping us grow,” said Zell Dwelley.
The couple secured a $1.1 million SBA 504 loan funded jointly by Chase and CDC Small Business Finance. The new Beach Break Café debuted in December — with long-time and new customers pouring in every day for Banana Crunch French Toast and other favorites.
Other local entrepreneurs have turned increasingly more to community banks and CDCs for funding needs.
“We saw a huge increase, as bank lending decreased. Banks were too conservative, with the credit box a little too small. Some may have taken on too much loss, or regulatory restrictions were too tight,” said CDC Small Business Finance Senior Vice President Robert Villarreal.
There are approximately 260 CDCs in the U.S. that participate in SBA 504 loans. Of these, CDC Small Business Finance is the largest, based in San Diego with offices in Arizona and Nevada. The company provides a host of financial products and services for owners of small businesses. In addition, the CDC reinvests in communities, particularly underserved markets and populations. In fiscal year 2010, CDC Small Business Finance provided 80 SBA 504 loans in partnership with banks, providing $47.4 million to small businesses.
Another factor contributing to past declines in lending to small businesses has been an overall deleveraging of that sector, observe San Diego banking executives.
“Most businesses have shrunk, so they need less credit. Businesses that had $30 million in revenue in 2007 are at $7 million today. But they still make a profit, managing through these hard times,” said Paul Rodeno, president and CEO of Security Business Bank.”
“Overall, you’re seeing loan balances coming down. That’s not unusual. Any time you have a contraction in a company and sales are down, you don’t expand. There is a less need for credit when there is no business activity to support it. So you see a reduced lending market for a given time due to the realities of today’s economy,” said Michael E. Perry, chairman, president and CEO of San Diego Trust.
Of late, industry leaders have observed an upswing in small business lending among banks. Villarreal views this as a positive thing. “CDCs are in no capacity to pick up the slack alone. We can’t handle the volume and we do not have enough capital,” he stated.
Security Business Bank is among local lending institutions working to increase lending to owners of small businesses. Clients benefiting from Security Business Bank SBA-backed loans include Marilyn O’Neill, who is adding a microbiology sector to her successful environmental consulting firm, Nautilus Environmental. The San Diego-based company has 35 employees with plans to hire two others. Because of the down economy, O’Neill initially had a difficult time securing traditional bank funding. She was ultimately able to obtain the $709,000 she needed through a 7(a) loan.
“Security Business Bank worked with me when other banks would not. They took the time to come out to tour the facility, see how we operate. I am a scientist by trade, but you have to know your numbers. They need to know you can run your business, and that’s what they found,” said O’Neill, who credits the expansion of her business to that vote of confidence.
Security Business Bank, in turn, appreciates the opportunity to be able to provide O’Neill and others with the capital needed to grow their businesses.
“Security Business Bank has a vibrant portfolio of small business entrepreneurs, which is growing rapidly as we head into 2011,” said Rodeno. “Our SBA lending team is expert in vetting entrepreneurial concepts, navigating the complex SBA regulations and pairing companies with the loan products needed to grow their businesses. As a community business bank, we’re in the trenches with our local small business clients, rolling up our sleeves, creating sound strategies, and supporting economic growth.”
Security Business Bank operates three San Diego locations including Downtown, Carmel Valley and Carlsbad offices. In September the bank hired the founders of the Bank of Escondido to open a fourth Security Business Bank branch in that area.
Other banks that cater to small businesses do so without participating in SBA programs. Among these are San Diego Trust, which serves small- to mid-sized companies through a range of direct lending products and lines of credit.
“The key is to get to know and understand clients. It is so challenging, because these are challenging times, but you have to understand your clients because they will be impacted. We ride out the storm with them, help them get through it,” said San Diego Trust’s Perry.
Perry reports that San Diego Trust is doing well, approaching $200 million in assets, and recently posting 25 consecutive quarterly profits. The bank has branches in Bankers Hill and Encinitas, and, most recently, Point Loma. He correlates the bank’s success to not being held to the same constraints as larger banks.
“Big banks are very standardized. If you don’t fit inside the box you don’t get financing,” said Perry. “Community banks don’t operate within those types of criteria. We look at each loan on its own merit and customize to the financial needs of that particular client. We are able to do so because we are not looking to package up and sell off loans to secondary markets. We keep everything for our own portfolio.”