Credit starved? Small Business Administration loans are whetting businesses' appetites
Laura and Rhett Roeth, proprietors of Discount Vials, rely on short-term SBA lending to build their inventory.
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Through June of 2013, Wisconsin banks collectively lent about $1 billion more to commercial and industrial borrowers than the year before, but as impressive as that sounds, it’s still roughly half of the annual increase that could be expected if the economy were growing at a boom-time pace.
At least that’s the assessment of Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association, who still points to the improving profitability of Wisconsin banks — 95% are in the black — and to the continuing reduction in the percentage of noncurrent loans.
While those metrics provide sources of comfort, community banks are also making some headway in convincing national and international rule-makers to treat them differently than the big investment banks that are more responsible for the nation’s 2008 financial meltdown. So while the economy is not yet firing on all cylinders, there is plenty of reason to be optimistic about the 2014 lending landscape.
“Wisconsin banks are very well positioned to meet borrowers’ credit needs,” says Oswald Poels. “The thing I continue to hear from our membership is an actual lack of demand. Businesses are really still sitting on the fence to see what happens nationally in terms of stability with our federal government and the economy in general.”
When Miriam Kuhn's bank experienced financial troubles, another bank recommended SBA lending for the high borrowing needs of her company, Contrail Aviation Support, a Verona-based broker of aircraft engine components.
Bankers cite a number of factors to account for this comparative lack of appetite, including still-fresh recessionary nightmares and the technology-enabled ability to do more with the same workforce, but there is no doubt they have ample money to lend.
Tom Spitz, CEO of Settlers bank, says banks have mostly dealt with the fallout from the financial crisis, especially loan-quality issues. The post-crisis period, when they were more focused on problem resolution than on new business development, has passed.
“Banks actually have a lot of money to lend, and they are looking for good credit in order to do so,” stated Spitz. “I hear that from virtually every banker I interact with.”
In a growing number of situations, U.S. Small Business Administration loan programs have not only whetted the business appetite for borrowing, they have also addressed a variety of business needs, from basic lines of credit to construction projects and other expansions.
The SBA has two business lending programs. The most heavily used SBA program is the 7A, a guaranteed program in which borrowers work with a local bank or credit union lender for everything from working capital, to machinery and equipment, to buildings and real estate. The SBA’s 7A loans are guaranteed up to 85% to a maximum of $150,000 and up to 75% for loans between $150,000 and $5 million. Borrowers can also refinance under the 7A, which last year accounted for 1,456 Wisconsin loans totaling $522.2 million.
The SBA’s 504 program covers fixed assets like buildings, real estate, and equipment, and borrowers can work with local lenders or a certified development company. Under a 504 loan, 50% would come from the financial institution, 40% from the SBA, and 10% from the borrower; the local lender gets first collateral position.
Eric Ness, Wisconsin district director for the SBA, notes that the guaranteed program removes much of the risk for banks, incentivizing them to make loans they would not otherwise make. Another benefit: As of Oct. 1, SBA is not charging fees on loans under $150,000 for the lender or the borrower. “I think that’s going to generate a lot of small business lending in the state because the lenders will have our guarantee under 7A and be able to get that guarantee on a lot of businesses around the state,” Ness stated.
Ness also contends the availability of SBA funding is reliable and says it was unaffected by the recent government shutdown. Nationally, the SBA supported $29 billion in loans under the 7A program last year. “We won’t run out of money,” he stated.
Inside, we profile three local companies that believe the lending waters are fine and that have taken advantage of SBA loans for a variety of business purposes.
Rhett Roeth, owner of Madison-based Discount Vials, admits to being afraid of credit since childhood, and as a general business philosophy, he has tried to do without it whenever possible. But when you need to restock, that’s not always possible.
Roeth, a service-disabled veteran who holds down a full-time job at the Milwaukee Street post office, doesn’t have a lot of formal business training, and it took some convincing to get him to pull the credit trigger. “I was raised [to believe] that credit is probably one of the worst things this world has ever seen,” he says, chuckling at the memory. “As a small business owner, borrowing to me was something that was very scary.”
In 1999, he founded the company that would eventually become Discount Vials, an online distributor of glass packaging, and he moved it out of his basement and into a warehouse facility only two years ago. About the same time, he secured an SBA loan for a line of credit, not for the purpose of expanding but to occasionally replenish inventory.
Some of the fear of being overleveraged was removed by the fact that he can get a short-term loan, quickly pay it off, and move on at a relatively low cost. Roeth says he “bumps into” the SBA line of credit six or eight times a year, typically for a very short term of 10 to 15 days. The interest rate is between 7% and 8%, which he viewed as competitive with the traditional bank lending he investigated, and there was also a small SBA funding fee.