Loans under the Small Business Administration to local borrowers dropped 18% as borrowers held back on deal-making due to rising interest rates.
The loans fell to $154.9 million for the six-month period ended March 31. The decline compares to double-digit increases over the prior four years that ranged from 20% in 2022 to 77% in 2020.
The biggest reason was a jump in rates for the SBA’s 504 lending program, which is used primarily to buy real estate, from 5.4% last September to 6.4% a month later, according to Mark Hogan, senior loan officer at Irvine’s CDC Small Business Finance.
“That increase put the brakes on for many prospective buyers,” Hogan told the Business Journal.
“Any time there is a sharp increase, buyers stop whatever they are doing and wait to see which way the market is going to go next.”
CDC Small Business Finance reported its lending fell 53% to $23 million for the six-month period, dropping it from the top spot to No. 2. On last year’s list, it was able to double its own loan growth to $49.2 million.
Jumping from No. 7 to No. 1 was Oakland-based Mortgage Capital Development Corp., also known as TMC Financing, which reported loans more than doubled to $23.9 million. The company operates locally out of Irvine.
“We’ve been focusing quite a bit on refinancing,” said Jennifer Davis, TMC’s senior vice president of business development. “A number of clients have variable rates. We made a big effort to identify those clients. Some clients wanted to ride it out, but they saw their payments going up month after month.”
Fewer Loans
The 16 lenders on this week’s list issued 156 loans, a 15% decrease from last year. The average loan size was $993,000, down from $1.2 million a year ago.
The list measures two types of loans: the 7(a) program for business acquisitions, equipment purchases and debt refinance; and 504 loans used for owner-occupied commercial real estate purchases and refinancing, as well as equipment buying.
The latter loan lets lenders ask for as little as 10% down, versus the typical 20% to 25% from their conventional banking products.
Companies see the SBA loans as a steppingstone to the big leagues, as the government-backed leverage lets them grow a newer business.
Eight of the 15 lenders on this year’s list are banks, which often view SBA loans as an important entry into the front door of small companies in growth mode. Other lenders are community development institutions and nonprofits.
Data comes from the SBA and includes only lending to OC borrowers, regardless of the lender’s headquarters or branches. Lenders advance anywhere from $5,000 to as much as $30 million.
Eight lenders reported a decrease in loans. The biggest drop was 70% at AmPac Business Capital of Ontario, where lending dropped 70% to $3.6 million. It dropped to No. 11 from No. 5 last year when it reported a 157% increase in loans to $11.9 million.
Optimistic
The lenders are still optimistic.
TMC’s Davis pointed out that Orange County and the Inland Empire lending is down 8% on an annualized basis, comparatively better than the 33% decline nationwide. The reason is because Orange County has a limited supply of commercial real estate, such as medical offices, she said.
“Even though interest rates are higher, they see the value of owning real estate,” Davis said. “With lease rates going up—it still pencils out to own.”
Hogan said buyers believe rates are more stabilized now, so they are better able to plan for their expenses than they did a few months ago.
“I see the market showing definite signs of good activity for owner/users,” Hogan said.
“Even though the market for product is still tight, there are a lot of buyers wanting to get prequalified so when the right building comes along, they are ready to make an offer.
“With most bank’s interest rates in the 5%-6% range, borrowers are getting used to the more ‘normal rates’ versus the 3.5% rates in the past few years. When I started in the business 16 years ago, the SBA rate at that time was 6.5% so things have gone full circle!” Hogan wrote in an email.
