The number of government-supported commercial loans issued in the region jumped last fiscal year to 358, up from 283 in 2010 and 231 in 2009.
The number of loans and loan amounts had declined three out of the four years between 2006 and 2009.
Administration officials said now-ceased stimulus funding helped fuel demand for government-backed loans by increasing the portion of the loans that were insured and eliminating program fees.
Although those incentives have ended, officials and financial consultants said government-insured borrowing by small businesses this year will still reach pre-recession levels, because businesses want access to capital because the economy is improving and they are more comfortable investing.
“The fact that loans are up is definitely a sign that some segments of the economy are growing,” said Pat Newcomb, director of the Ohio Small Business Development Center at the Entrepreneurs Center in Dayton.
Some groups representing small businesses, however, said the government loan programs promote favoritism and only help a very limited number of companies.
The Small Business Administration provides businesses with access to financing that do not qualify for conventional commercial loans, often because they lack sufficient collateral, said Scot Hardin, lead lender-relations specialist with the Small Business Administration’s district office in Columbus.
The administration encourages financial institutions to lend to these businesses through the 7(a) loan program, which protects lenders against defaults by guaranteeing between 50 to 90 percent of the loan. The administration issues also 504 loans, which are used to finance the purchase of fixed assets, usually real estate.
“We are there in the hopes that our guarantee will enable lenders to say ‘yes’ when they would have said ‘no’ otherwise,” Hardin said.
Between fiscal years 2006 and 2009, the number of government-backed loans issued in Butler, Champaign, Clark, Greene, Miami, Montgomery and Warren counties fell by 57 percent, and the value of those loans fell by 93.1 percent. Borrowing by businesses plummeted as consumer spending shrank and companies downsized.
But in fiscal year 2011, which ended in September, the administration approved 358 loans worth $97.2 million to businesses in the seven-county region. It was the second consecutive year of growth in both the number of loans and the amounts.
Government-insured commercial lending across the country increased to record levels in fiscal year 2011, partly because of a package of lending incentives contained in the American Recovery and Reinvestment Act and the Small Business Jobs Act, according to the administration.
The recovery act provided $730 million to the administration to allow it to alter its lending and investment programs. The stimulus provisions permitted the agency to raise its guarantee on 7(a) loans to 90 percent and eliminated fees for those loans and 504 loans.
“It was a more attractive program, because the client did not have to pay a premium to get the SBA backing,” Hardin said.
After stimulus incentives expired in September, lending dropped sharply in the 66 Ohio counties covered by the Small Business Administration’s Columbus district office, Hardin said.
Even so, he said loan numbers are increasing from the low points in October and November, and they are still up compared to the recession years, which is a positive sign because small businesses need to see sales improve before they are willing to go out and borrow money to expand.
“There has been an increased number of loans, and I don’t think it will be close to what it was last year, but it has been rebounding over what it was at the height of the slowdown in 2008 and 2009,” Hardin said.
Helping businesses
Mary Burr, 45, of Xenia, said she and her sister-in-law and business partner, Cindy Burr, took out a $40,000 administration-backed loan from Huntington Bank to open a new business called Busy Bee Cafe, located in the Berns Garden Center at 3776 Indian Ripple Road in Beavercreek.
Burr said the government-backed loan helped cover the cost of building the kitchen and the cabinets and making the space necessary to install essential equipment.
Burr said she and her partner were unable to get equity out of their homes to pay for the project, which she says was fortunate in retrospect because that is a risky way to finance a business venture. Burr said her debt ratio did not qualify her for a conventional loan, even though she and Cindy Burr are employed full-time and handled the catering for Coach’s Grille in Xenia.
Burr said Busy Bee Cafe would not exist without the Small Business Administration’s loan program.
“It just wouldn’t have happened, at least not last year,” she said.
Newcomb, with the Entrepreneurs Center in Dayton, said government-backed loans are not given to businesses because they are troubled, but rather because they do not meet the fairly conservative lending requirements of banks.
She said some businesses do not qualify for standard loans because they lack sufficient assets that lenders can liquidate to recover their losses in the event of default. She said start-up companies and new ventures that lack a cash flow often are not eligible for regular loans, even when they are headed by people with strong business plans.
“The SBA primarily uses their loan and loan guarantee programs like insurance programs to induce a business lender to increase the loan size or extend the length of the loan term beyond their internal credit policy guidelines,” she said. “Poor investment risks due to lack of equity capital, lack of collateral support and lack of cash flow are still poor risks even with guarantees or similar enhancements. Lenders use tools like this for those situations that with a little bit of help can become a decent deal.”
Karen Shauri, state director of the Small Business Centers of Ohio, said businesses only assume the risk of borrowing money when they have confidence the loans will help make their companies more successful.
“Businesses are not usually borrowing money for the sake of borrowing it — they are making a conscious decision to invest back into their business to grow that business,” she said.
Credit improving
Although credit remains tight, financial analysts said the lending climate for small businesses is better than it was during the depths of the recession and continues to show improvement.
JPMorgan Chase & Co. increased small business loans by 52 percent to $17 billion in 2011, and it provided 400,000 new loans and lines of credit to small companies, said Michael Lubansky, senior financial analyst and product manager with Sageworks, a national technology- and financial-information company.
Chase leads the country in Small Business Administration loans, but Huntington Bank is the leader in Ohio. Huntington made 326 administration loans worth $40.2 million in the state between October and the end of December.
Lubansky said Citibank also increased lending to small businesses last year by 30 percent to $7.9 billion, compared to 2010. “These are positive signs,” he said.
Those trends may continue in 2012. A survey released in February by Wells Fargo and Gallup found that about 28 percent of the country’s small businesses plan to increase capital spending in the next 12 months, the highest level in four years.
But critics of the Small Business Administration’s loan programs say that the vast majority of the entrepreneurs in Ohio have never received a government loan, and the programs reward a select few businesses with government support while all others receive no assistance.
“In essence, when you start handing these loans out, the government is in the business of picking who is going to win and who is going to lose in this environment,” said Roger Geiger, executive director of the Ohio chapter of the National Federation of Independent Business. “Our membership is very uncomfortable with that, they think in general, that it is a wrong role of government.”
Geiger said access to credit is not the main hurdle facing small businesses. The bigger obstacles, he said, are that consumers cut back on spending and businesses are reluctant to invest until they have more certainty about what government regulations they will have to follow.
SBA loans “are not the cure all to small businesses’ economic challenges in the state by any stretch of the imagination,” he said.
Contact this reporter at (937) 225-0749 or cfrolik@DaytonDailyNews.com.
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