Small business loans surge, But bottom to drop out as stimulus dries up
St. Louis Business Journal
February 26, 2010
by Rick Desloge
Michael Pruitt and Russ Odegard, founders of DynaLabs, put the final piece of their financial puzzle together last fall with a $200,000 loan guaranteed by the Small Business Administration.
And last month Dr. James Guida was able to refinance his dental office in O'Fallon, Mo., with an SBA loan through U.S. Bank that cut his interest rate almost 1 percent.
DynaLabs is using its loan to begin manufacturing a new drug testing tool. The loan to DynaLabs was generated by St. Louis Bank.
They are among the lucky small business owners here to land a stimulus-backed SBA loan before the SBA ran out of money backing the program the third week in February.
There's been a surge in demand for SBA loans because the SBA agreed to drop all loan fees and gave banks originating the loans a higher guarantee -- 90 percent of the loan -- as long as federal stimulus money held out. And since few banks are making conventional loans, the SBA loans have been one of the few financing alternatives for small businesses.
The stimulus-backed loans helped the SBA's St. Louis district office record a 74 percent increase in loan dollar volume to $51.9 million, and a 59 percent increase in the number of loans to 210 during the four months that ended in January, compared with the same period a year earlier.
The local increase mirrored a national surge in SBA lending during that four-month stretch. Dollar volume of the SBA's popular 7(a) and 504 loan programs grew to $6 billion, a 76 percent increase, and loans grew to 18,066, a 37 percent increase, compared with the same four months a year earlier.
Borrowers were especially attracted to the SBA loans by special features made possible by the federal stimulus. For example, dentist Guida paid no SBA loan fees, which normally range from 2 to 3.75 percent of a loan. In addition, the SBA guaranteed 90 percent of the loan balance to its originator, U.S. Bank, up from 75 percent to 85 percent of the loan before the stimulus program.
Diane Wier, Commerce Bank's SBA coordinator, said she had been urging borrowers earlier this month to get their SBA applications in, since the small business lending program was on pace to run out of money by the end of the month.
Commerce is the local dollar leader in the program, generating 15 loans totalling $2.9 million between October and January. U.S. Bank is the leader in loan volume, producing 26 loans totaling $1.3 million during the period.
Wait and see
Had the funding continued at the same pace, the St. Louis SBA office would finish the government's fiscal year Sept. 30 producing more than $150 million in loans, compared with $103 million for the fiscal year that ended Sept. 30, 2009, said Dennis Melton, St. Louis District manager for the SBA. (The local record year was fiscal 2007 when the office generated $178.4 million from 1,173 loans).
Now, with stimulus funding for the program dried up, the SBA has set up a waiting list for lenders hoping Congress places more funds into the loan program.
It's the second time SBA stimulus funding has run out. Last Nov. 23 the program used up $375 million in stimulus funds that made the higher loan guarantee and fee reductions possible. More than 1,000 loans were sitting in a queue in December when Congress added $125 million in funding for the program, money the SBA just exhausted.
So far, Congress has not made any additional funding available, and Senate Majority Leader Harry Reid, D-Nev., stripped funding to continue the SBA loan enhancements from a jobs bill earlier this month.
Without the SBA backing, financing remains tight for many small businesses. AdvisorCheck, a Chesterfield online service that provides consumers with background checks on financial industry advisers, has been unable to replace an SBA Patriot loan obtained last spring that it used for operating capital. Chief Executive Bryan Binkholder said the company paid off the nearly $250,000 loan late last year after his former partner left the business. Since then, Binkholder said he's talked with three lenders, including U.S. Bank, which initiated the Patriot Loan, but has not yet secured new financing.
For most small businesses, SBA loans are their best shot at obtaining financing. Commerce Bank is making a few conventional loans to small businesses -- some of whom want to avoid an SBA-backed loan. "There's some extra paperwork (with the SBA)," Wier said, and despite the favorable terms, she said some borrowers still think there's a stigma to SBA loans that the borrower is less creditworthy.
