Small business lending environment is mixed bag, U.S. SBA reports

   Small business lending is on the upswing for the first time since the Great Recession, says a recent report from the U.S. Small Business Administration’s Office of Advocacy.
   But the report’s message is mixed. While the number of outstanding loans of less than $1 million increased from 21.3 million in June 2012 to 23.5 million in June 2013, the aggregate amount of the loans fell 3.1 percent to $587.8 billion. Still, that’s better than the 6.9 percent decline of the previous 12-month period.
   “While overall small business lending continues to decline, we are not seeing the sharp decline we saw in recent years or the extreme decline we saw in 2008,” said Winslow Sargeant, chief counsel of the Office of Advocacy.
   “More importantly, the study shows an increase in the number of small business loans, more loans going out the door, which underscores the positive turn in our country’s economic landscape,” he said.
   Sargeant says non-traditional capital sources like angel investors and crowdfunding could also be affecting the overall lending picture.
   Recent lending trends in Illinois differ somewhat from the national trends. Here, the number of loans has declined while the aggregate value of loans has increased.
   The Small Business Administration does not make loans. It provides partial guarantees of loans made and administered by commercial lenders, typically resulting in lower interest rates than non-SBA loans.
   The SBA’s 7(a) Loan Program (authorized by section 7(a) of the Small Business Act) guarantees loans for a variety of general business purposes. The agency’s 504 program guarantees loans for acquisition of major fixed assets for business expansion or modernization.
   In Illinois, the number of new small business loans for first 10 months of fiscal 2013 (Oct. 1-July 31) fell slightly compared to the corresponding period a year earlier, but the value of the loans was slightly greater.
   The SBA reported 1,544 loans valued at nearly $772 million in Illinois for the fiscal 2013 period, compared to 1,702 loans worth just under $770.1 million in fiscal 2012.
   SBA spokesman Mark Ferguson attributes the decrease in the number of loans to the expiration of the SBA’s temporary 504 debt refinancing program in October.
   When real estate values plummeted, even many healthy small businesses found it difficult or impossible to restructure or refinance maturing debts. The one-year 504 refinancing program allowed qualified borrowers to refinance debt without the normal requirement that businesses be expanded. Many small businesses took advantage of the program.
   Ferguson says the fiscal year-to-date data reflects both the end of the refinancing program and an increase in 7(a) loans.
   David Frank, president and general counsel of SomerCor 504 Inc., Chicago’s biggest SBA-certified 504 loan originator, said debt from the 504 “refi” program is flowing into the 7(a) program but overall small business lending is little-changed in Illinois.
   “The honest assessment for the state of Illinois is that (lending is) flat,” he said, adding that he wishes more loans were being made.
   “This is probably the cheapest source of capital in the marketplace,” said Frank. Banks, accountants, attorneys and financial advisors “need to get the word out” to their small-business clients.
   A commentary released in August by the Federal Reserve Bank of Cleveland blames a litany of factors for the depressed state of small business lending since the recession and says policymakers may need to intervene to improve small business owners’ access to credit.
   Written by Ann Marie Wiersch, a policy analyst at the bank, and Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University and a visiting scholar at the bank, the report says small business lending remains weak despite banks having plenty of money to lend. It says small businesses continue to experience soft demand for their products and services and just aren’t borrowing as much as they would in a faster-growing economy.
   Small business financials continue to be weak and collateral values remain depressed in a still-sluggish real estate market, according to the report.
   “The decline in value of both commercial and residential properties since the end of the housing boom has made it difficult for business to meet bank collateral requirements,” said the analysts.
   They add that potential borrowers also are facing tighter lending standards and fewer banks from which to borrow. Business lending has become less profitable than other types of lending and bank consolidation has reduced the number of banks focusing on small business borrowers, according to the report.
   The analysts say the recession is not entirely responsible for the decline in small business lending.
   “Banks have been exiting the small business loan market for more than a decade,” the report says. “This realignment has led to a decline in the share of small business lending in the banks’ portfolio.” That share has fallen from 51 percent in 1998 to a current 29 percent, according to the report.