MARY COTOIA
Smaller loans popular
The U.S. Small Business Administration has come under fire for eliminating a loan product that was popular with smaller banks, and some bankers have complained that the federal agency’s budget has been slashed and fees increased in recent years.
But the SBA says one-time appropriations and leftover funds from earlier years mean it hasn’t suffered deep budget cuts. Massachusetts lenders, meanwhile, continue to give the agency and its loan programs high marks, and say their customers do, too.
“SBA loans are the most popular I’ve seen used in the marketplace for small businesses,” said Mary Cotoia, executive vice president and chief lending officer at Bank of Cape Cod, a commercial bank that opened last fall in Hyannis.
The $30 million bank has approved two SBA-backed loans to date, according to SBA data, but Cotoia said the bank also has backed many other smaller loans.
Many business owners today are seeking smaller loans, Cotoia said.
“They’re your landscapers, your painters, your electricians – existing businesses looking to buy equipment or have short-term working capital.”
The bank continues to close more loans under $50,000. It wants to approve them, since once it has made 20 loans of that size, it will be eligible to qualify as a lender in the SBA Express program.
Massachusetts lenders say they like SBA Express since it allows them to use their own application forms, provides a 50 percent government guarantee on loans under $350,000, and has a faster turnaround time and carries lower customer fees than other SBA products. The fee is based on the guaranteed portion of the loan.
But the Independent Community Bankers of America – a trade group whose membership includes 50 Massachusetts banks – says fewer small banks these days are able to offer SBA loans of any size because the agency recently eliminated another type of loan, the Low Documentation – or LowDoc – loan, which the group characterized as especially popular with smaller banks because it offered an 80 percent government guarantee on smaller, riskier loans.
SBA Express, the agency’s most popular loan product, guarantees 50 percent of a loan and has been offered in place of the LowDoc.
SBA Press Office Director Michael Stamler said the LowDoc product was eliminated because its default rate was too high, but ICBA said that without it, smaller banks often are unable to meet the credit needs of newer businesses that pose higher risks.
The trade group’s chief economist, Paul Merski, said that the absence of the LowDoc product hurts both lenders and entrepreneurs.
Although there is no asset-size requirement to be an SBA Express lender, banks wishing to use the program for the first time must have at least 20 commercial or business loans of $50,000 or less on the books as of the institution’s most recent fiscal year. In addition, existing SBA lenders must keep default rates on SBA loans at 15 percent or less.
“Larger banks use the [SBA Express] programs. We want the diversity so more lenders can participate,” Merski said.
The Big 10
But Michael Wheeler, senior vice president for commercial lending at $241 million Beverly Co-Operative Bank called SBA Express “much more efficient” than the LowDoc program, especially because banks are allowed to use their own application forms rather than forms mandated by SBA. Customers like it for the fast turnaround time, usually 36 hours, he said.
Bay State banks have seen their SBA loan numbers fluctuate in recent years, while average loan size has increased from $84,865 in 2003 to $99,655 last year.
That bucks the national trend, which saw the average loan size decrease from $167,000 in 2003 to $149,000 last year.
“We don’t trim the loan sizes,” Stamler noted. “[The smaller amounts] are what’s being requested.”
More individual SBA loans are being approved each year, he said. Last year, 97,270 SBA loans were issued compared to 67,306 in 2003. The total dollar volume of SBA loans also has increased nationally, rising to $14.52 billion in 2006 from $11.27 billion in 2003.
The total number of SBA-backed loans approved in Massachusetts has ranged from a low of 2,610 in both 2003 and 2006, to a high of 3,068 in 2004.
Some Massachusetts banks and credit unions have reported dramatically increased loan numbers, however.
For example, $230 million-asset Greenfield Co-Operative Bank saw its average SBA-backed loan size decrease in recent years – to $40,000 this year – but is issuing more loans. Greenfield already has approved 12 SBA loans in 2007, compared with 11 originated for all of last year. Between 2003 and 2005 it approved four in total.
“We couldn’t have taken the risk on some of the smaller loans but for the SBA,” said President and Chief Executive Officer Michael Tucker. He said he thinks the number of loans offered is more significant than the size, since more loans mean more opportunities for individual business owners.
Pittsfield-based Greylock Federal Credit Union has nearly doubled the number of loans approved every year since 2003. Last year, with 57 loans approved for a total of $5.5 million, it became the eighth-largest SBA lender in the state.
“We do a lot of loans that range from $10,000 to $200,000,” said Bill Ryan, assistant vice president and commercial loan officer at $875 million-asset Greylock.
Beverly Co-Operative Bank approved six SBA-backed loans in 2006, up from just one in 2003. The average loan size there has remained around $175,000.
Despite individual successes at smaller banks, Massachusetts’ largest lenders continue to approve the vast majority of SBA loans. In 2006, the top 10 SBA lenders, which includes the state’s five largest banks, approved 2,017 of 2,610 loans. With the elimination of the LowDoc loan, big banks are likely to dominate the SBA loan market to an even greater extent in the future, according to ICBA.
“With 9,000 [U.S. banks] that can deliver small-business loans, why are only 10 banks doing [the vast majority]?” Merski said. “You need to structure the loans so that more lenders can offer them.”
SBA Express loans, however, rely much more on credit scores than did the LowDoc product, which, according to Merski, limits the ability of community bankers to properly weight other credit factors.
“The typical SBA loan is for someone who doesn’t have a background in business,” he noted, and sometimes a single credit score doesn’t do those people justice.
Stamler acknowledged that the SBA Express product “does rely a lot on credit scores,” and Citizens Bank, which has made more SBA loans than any Massachusetts lender since 2002, said it does consider the applicant’s credit score first when deciding on whether to make a loan.
Other factors may come into play, as well, said Citizens Financial Group’s Senior Vice President and National Director for Government Lending Programs Gary Heidel.
“Depending on the size of the loan and complexity of the business, we might also require additional information such as financial statements, tax returns and industry activity,” he said.
Ryan said lenders at Greylock consider an applicant’s personal and commercial credit history, but focus mostly on his or her business and marketing plan, the strength and track record of the management team and the business’ cash flow.
He said his credit union’s experience with the SBA has been positive since it first partnered with the agency in 2002.
“They’ve made funding available to us for businesses that otherwise wouldn’t have been able to get a loan,” Wheeler said.
