Small-Business Stimulus Loans Off to Slow Start
Banks have created high hurdles for applicants and rejected many, like Mark Rusin, owner of the Loop in Arizona.
By ROBB MANDELBAUM
New York Times
August 12, 2009
Small-business owners hoping for some assistance of the sort given to the nation’s biggest banks applauded when the Small Business Administration unveiled a lending program in May.
Washington officials and some lenders predicted that the program, providing emergency bridge loans as part of the economic stimulus package, would save jobs and provide a lifeline for vulnerable businesses. Many in the banking industry expected it to be fully subscribed in months.
But the program is off to a slow start, and many banks, including some of the largest, appear reluctant to take part.
With $255 million, the program is prepared to make about 10,000 loans of up to $35,000 each. As of Monday, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended.
While the agency maintains that the program is on track, some in the banking industry say the banks are moving slowly because they have little incentive. “There’s not a lot of profit motive in a $35,000 loan stretched over six years,” said Paul Merski, chief economist for the Independent Community Bankers of America, a trade association.
Bob Seiwert, of the Center for Commercial Lending and Business Banking at the American Bankers Association, says “stringent underwriting standards” will require as much work as larger loans, making these even less economical.
Alex Cooper, a counselor at the Pima Community College Small Business Development Center in Tucson, says he has helped nearly 30 clients apply for the loans. None has received one.
“It’s a disappointment,” said Mr. Cooper. “I thought the banks would be more interested in the community and try to help small businesses.”
Under the program, known as America’s Recovery Capital, a business owner applies to a bank for a loan and, if approved, can use the proceeds to retire existing debt. The borrower pays no interest on the new loan.
Instead, the Small Business Administration pays the bank two percentage points over the prime rate. After a one-year deferral, the borrower repays the loan over five years. The agency will repay the lender in case of default.
At the current rate, the program could have loans available through September 2010, when it is set to expire. “We like the fact, actually, that they will be spread out over time,” said Karen G. Mills, head of the Small Business Administration. “We have no doubt that we will make 10,000 loans.”
Not surprisingly, small-business owners are less pleased with the slow pace. Among the frustrated applicants is Mark Rusin, a client of Mr. Cooper’s whose restaurant business has fallen precipitously in the last year.
Mr. Rusin bought a franchise location of Uno Chicago Grill north of Tucson in April 2007 for $3.2 million. He dropped the franchise agreement because of fees and restyled the restaurant as the Loop Taste of Chicago.
Then came the recession. As the snowbirds left for points north this spring, sales tumbled. June revenue was $72,000, down 28 percent from a year earlier. “I’m bleeding out to the tune of 10 grand a month right now,” Mr. Rusin said. One of the new loans, he said, would see him through the next couple of months.
Part of the problem for borrowers like Mr. Rusin may be that Congress restricted loan eligibility to companies that are simultaneously struggling yet viable. That means the business must face an “immediate financial hardship,” meaning a 20 percent reduction in a critical operating number, such as revenue.
But the company, which has to have been in business at least two years, also has to have shown positive cash flow, if not an actual profit, in one of the last two years. It also must do a two-year cash-flow projection to show it can repay all its obligations.
The effort required to verify all of this probably explains why those banks that are participating in the program are lending primarily to existing clients. “From a financial perspective, it really is a loan that makes sense for an existing customer,” Mr. Merski said. “You’re not going to have to put out a lot of resources to do a very costly underwriting. You know the business.”
Mr. Rusin was fortunate in that the lender holding a first position on his commercial mortgage, M & I Bank of Milwaukee, is participating in the program. He hoped to use the loan to pay his vendors. But soon after he submitted his application, Mr. Rusin said, the bank told him he could use the loan only to pay down the earlier debt owed to the bank.
M & I ultimately denied Mr. Rusin’s application. The bank, he says, told him that was because his business had failed to show a profit in either of the previous two years, despite the more forgiving guidelines of the program.
M & I Bank declined to comment on this, citing privacy laws and its corporate policy.
“The guidelines are just that, a guideline,” said Mike Stamler of the Small Business Administration. The agency and the banks, he says, have the flexibility to deny an applicant that meets the guidelines — or approve one that does not, as long as the loan is deemed “reasonable.”
It would appear that banks like M & I are using that flexibility more to deny than to approve loans. For example, Wells Fargo, one of the largest Small Business Administration lenders, has received 700 to 800 completed applications, said Tom Burke, the senior vice president overseeing small-business loans at Wells Fargo, but has approved only “several dozen.” (As of Monday, the agency said it had in turn blessed only three of them.)
“What we’re seeing,” Mr. Burke said, “is a lot of people who are incredibly leveraged, and it’s very difficult for them to pay back their existing debt, much less take a new one.”
Mr. Seiwert of the American Bankers Association and Mr. Merski of the independent bankers group say banks are lending conservatively because they fear the agency will renege on its guarantee.
“While the loan is 100 percent guaranteed, it’s only 100 percent guaranteed if you follow all of the underwriting guidelines, and some of those guidelines are very fuzzy,” Mr. Seiwert said. “If you miss one, you put your whole loan at risk.”
Ms. Mills of the small-business agency acknowledged that there had been tension over guarantees but said that issue had largely been resolved. The agency, she added, honors its guarantee in “95 percent of the cases, and we’re fairly quick about our turnaround as well.”
The leaders of the small-business committees in Congress do not criticize the banks. Mary L. Landrieu, Democrat of Louisiana and chairwoman of the Senate committee, said through a spokeswoman that she understood their reluctance to lend to struggling firms.
Nydia M. Velázquez, Democrat of New York and chairwoman of the House committee, accused the small-business agency of failing to establish the program within the 15 days that Congress demanded and of failing to reach out to banks. But Ms. Velázquez, who has claimed some credit for inserting the lending provision into the stimulus bill, said through a spokesman that she expected additional lenders to participate “as they learn more about the program’s incentives.”
Ms. Mills of the agency agrees that more banks will sign up. But she defends the time spent establishing the program. The new loans “have a much higher risk profile than what the S.B.A. usually does,” she said. “So we have taken great care to be good stewards of the taxpayers’ money.”
Mr. Rusin, for his part, remains optimistic. He persuaded one of his lenders to defer payments on a loan, saving himself more than $50,000 in the short term. Even before getting the deferral, Mr. Rusin insisted that once construction near his restaurant was out of the way and the recession was over, “I should be in pretty good shape here.”
As if on cue, a couple finishing an early dinner headed toward the door. “You’ve done a wonderful job here,” the man said. “It was the taste of Chicago.”