Helping hand for small businesses
By Jeremy Hay
The Press Democrat
December 25, 2009
In January, with the economy in near freefall, customer calls to Luxury Products dropped from 200 a month to just one.
“Business stopped, literally stopped,” said Chris Welch, CEO of the Santa Rosa-based designer of custom appliances.
The company turned to its cash reserves and credit lines but bankers then froze all its credit lines, Welch said, and some asked to be repaid right away.
Welch did what he had to.
“When cash flow stops, the first thing you do is lay off employees,” he said.
Turned down for more credit at local banks, he looked to the U.S. Small Business Administration, which under the American Recovery and Reinvestment Act received $375 million and altered conditions of its key loan programs in a bid to restart small-business lending.
Luxury Products was approved for a $139,000 SBA loan. The money allowed the company to move forward until business revived — and Welch rehired the two employees he'd laid off, a marketing and Web site manager and an operations manager.
“It wasn't a massive loan, but it really was,” he said. “It allowed us not to live on just our own internal cash, and it allowed us to expand ... to invest in the marketplace to add market share.”
Since the federal stimulus act passed in February, the SBA has guaranteed 59 loans amounting to $25 million in Sonoma County, agency records show. Those loans have ranged in size from $7,500 to $1.6 million, and have gone to borrowers ranging from jewelers to wine bottlers.
California companies have received 3,892 SBA recovery loans valued at a total of $2.75 billion through the agency's two main loan programs, according to Mike Stamler, an SBA spokesman.
“The SBA is the best thing going right now,” said Gene Crozat, owner of G&C AutoBody, which used a $1.6 million recovery loan to help finance a new Sonoma County shop.
The total value of the local recovery loans is small relative to the county's $21 billion economy — and some critics say it is far from enough.
“Those are good steps but from our perspective it's not doing a ton to assist small businesses who are still unable to obtain loans,” said Chris Gunn, spokesman for the American Small Business League, an advocacy group in Petaluma.
But for the broad stripe of small businesses that have been able to get them, the loans have meant the difference between growing or shrinking, opening or, perhaps, closing.
“It was a stimulus,” said Mara Shepard, a jeweler whose $389,700 SBA loan enabled her to open a jewelry store at Coddingtown Mall. “It worked in my case.”
Shepard was trying to buy her former employer, the Earthworks jewelry shop — which had shut its doors — when the economic crisis closed off lending streams.
“It was not looking good,” Shepard said of her prospects of getting the financing she needed.
Her banker suggested she pursue a recovery loan. She was approved, the SBA waived about $9,000 in application fees and, in September, just in time for the holiday season, Shepard opened her doors.
“I was able to bring four people besides myself back from unemployment and bring some part-time people back too,” she said.
In Petaluma, Wally Stevensen turned to the SBA for a $349,300 Recovery Act loan to refinance his downtown Petaluma Collective building, which houses a military antiques store and museum and a collective of 20 antiques dealers.
He said he'd struggled to get the financing — despite having perfect credit — and in the end went to a Sacramento bank for help obtaining the SBA loan.
“Everyone at the time was tightened up,” he said. “If we didn't have the loan I don't know what we would have done — I guess they would have foreclosed on us.”
This week, President Obama signed a defense appropriations bill that included an additional $125 million for the SBA to continue its “enhanced” lending programs. The agency estimates that will generate $4.5 billion in small business lending.
The SBA doesn't lend money directly; it guarantees portions of private bank loans. Under the Recovery Act, the SBA waived or lowered fees on those loans and increased the amount of a loan it would guarantee to 90 percent from 75 percent.
That reduces the risks to banks, making it easier for them to lend to businesses that, due to declining revenues, for example, may be less attractive borrowers in a recession.
“By allowing us to get back in there and do deals that we haven't been able to do, this SBA program allows us to say, ‘Okay, let's go,'” said Tony Ghisla, senior loan officer at Exchange Bank.
The Santa Rosa bank in October opened a new department devoted to making SBA 7a loans — the agency's largest loan program.
“The opportunity for us to work with our businesses is certainly enhanced through the SBA operation,” said Bill Schrader, the bank's president. “It allows us to put together some practical solutions and start moving our economy forward.”
Economists say it's one of the more effective aspects of the targeted stimulus spending.
“It's a good way of using federal stimulus money because it's put to work immediately,” said Robert Eyler, director of the Center for Regional Economic Analysis at Sonoma State University.
From tourism to high-tech, “small business plays a really important role in Sonoma County just because of the structure of the economy,” said Steven Cochrane, managing director at Moody's Economy.com.
But those businesses are often first to feel the vise of tightening credit markets, he said.
“A larger public company can go to the credit market or the equity market,” he said. “A small company just doesn't have any alternatives. They have to go to the bank downtown, and when they clamp down there often is really no other alternative.”
At the height of the credit crunch, “banks had just tightened up credit unbelievably,” said Crozat, of G&C AutoBody, which has three shops and 53 employees. Seeing in the recession an opportunity to expand at a lower cost, Crozat wanted financing to open a new body and fender repair shop — but he was having trouble securing it all.
He turned to the SBA and was approved for a 20-year $1.6 million loan, with $24,000 in fees waived under the Recovery Act. He said he expects to save about $5,000 a month in payments under the loan terms.
“It's a hell of a deal. It made such a significant difference, it's a godsend, a blessing,” Crozat said. The new G&C shop — developed at a total cost of about $7 million — should open in May in Windsor, and will employ about 25 people, he said.
At Top It Off Bottling, a mobile wine bottling company with about $1.5 million in annual revenues, a $932,000 SBA loan was used to reorganize capital, lower debt payments and buy equipment, said Randy Ramos, a company partner and vice president.
Those changes helped the privately-held Sonoma-based company to hire a new full time bottler — at a salary of between $60,000 and $80,000 a year — and keep two bottlers employed, Ramos said.
At about the time Ramos' company was getting its loan, a retired Texas businessman was applying for an SBA loan to help buy the historic Applewood Inn, a Guerneville bed and breakfast and restaurant.
“We decided that it would be a good avenue to pursue, that the banker would be much more interested in the loan if they were partnering with the SBA and only sharing some risk,” said Carlos Pippa, who bought the inn in November.
He was approved for a $1.05 million loan that helped leverage the rest of his $3.5 million loan from the Sonoma County-based Redwood Credit Union.
“We do plan to grow the business,” Pippa said, “so this would stimulate jobs. And I think it would have been difficult under the present lending conditions to obtain the total package from the bank.”
Redwood Credit Union vice president of business services Michael Downey wouldn't speak specifically to Pippa's loan. But, he said, “It's obviously been a really challenging year for the credit markets in general, and lenders did in many cases pull back.”
“In an economy like this,” Downey said, “it's not unreasonable to find that lenders may find it more difficult to find creditworthy borrowers.”
But the Recovery Act provision to waive fees made loans more affordable, effectively making credit cheaper, he said. Together with the higher loan guarantees, “in some cases, it may have been the difference in being able to qualify” loan applicants, he said.
From November 2008 to this October, the credit union issued 16 SBA loans totaling $8.3 million; about 90 percent of those were Recovery Act loans, Downey said.
“In many cases these are loans that could not have been done without the SBA loan program and the further enhancements that were offered by the Recovery Act,” he said.