New federal loan guarantees designed to spur lending to small business are due by spring, according lenders working with the Small Business Administration district office in Santa Ana.
The government plans to guarantee $3 billion worth of loans made by banks under what’s known as the 504 SBA program, named for a section of the Small Business Act of 1953.
The goal is to drive lending and spur interest in loans when they’re bundled and sold as bonds to Wall Street—a market that has all but disappeared since the financial meltdown of 2008.
“Private banks can now get some sort of guarantee indirectly from the SBA,” said Rachel Baranick, deputy director of the SBA’s district office in Santa Ana.
504 SBA loans are designed to help small businesses buy buildings or machinery with low rates subsidized by the government.
Borrowers put up 10% of their own money. Banks fund about half of a 504 loan. Government-backed certified development companies chip in the rest.
The government now plans to guarantee 80% of a bank’s portion of a 504 loan.
The guarantee should free “up more capital for banks to lend,” Baranick said.
With the federal government assuming much of the risk for banks, the thinking is they’ll make more SBA loans.
The hope also is that the guarantee will spur investor interest in 504 loans packaged as bonds. That would allow banks to use proceeds from bond sales to make more loans.
The guarantees were approved last year as part of the federal stimulus package.
A pullback in bank funding has been a complaint of small businesses here and across the country.
“Lending isn’t like it was two or three years ago,” Baranick said. “The number of small-business loans has gone down and still isn’t back to where it used to be.”
In 2007, the SBA saw almost three times as many loans in Orange, Riverside and
San Bernardino counties than it did last year.
That figure also includes 7a SBA loans, which cover everything from startup costs to projects requiring working capital.
“In the past quarter, we started to see an uptick in both types of loans,” Baranick said. “So we’re hoping the lower volume we saw for 2009 was actually the bottom.”
SBA 504 loans in OC jumped 46% in the fourth quarter from a year earlier, according to San Diego-based CDC Small Business Finance, the most active CDC lender here and in the Inland Empire.
CDC and bank loans through the 504 program were $74 million in the fourth quarter.
Forty loans were made in OC under the 504 program, according to CDC Small Business Finance.
The SBA has been upping incentives for banks to take advantage of in the 504 and 7a programs.
Using some $730 million set aside in federal stimulus money for small-business lending, the SBA has been cutting fees and increasing guarantees to attract more private lenders.
But large banks have been slow to do more small-business lending, according to Todd Richey, a lecturer at the Paul Merage School of Business at the University of California, Irvine.
He has been studying impacts of government incentives rolling out in the past six months on local financial markets.
“The SBA has been attacking the supply issue,” he said. “But there’s also the demand side of the equation.”
Small businesses are focused on cutting costs and improving efficiencies, not borrowing, Richey said.
“A lot of the stimulus money isn’t being pumped back into the economy,” he said. “It’s still sitting on banks’ balance sheets. People just don’t want to add more debt unless absolutely necessary. The whole economy is going through a deleveraging process that’s going to take a long time.”
In the fourth quarter, Wells Fargo & Co. was the most active SBA lender in OC and the Inland Empire. It had 46 7a loans worth a combined $17.9 million.
The next biggest was Beverly Hills-based Excel National Bank with 25 loans totaling $27 million.
Four others had loan activity of 20 or more in the quarter. Most were smaller community and regional banks.
“If you look at the top 10 lenders working with loans through the SBA in our district, only three are national banks,” Baranick said. “We’re seeing more community banks starting to use the SBA loan programs and stepping up to fill the lending vacuum for small businesses.”
