After seeing a 31 percent drop in loan volume in 2009, Small Business Administration lenders in Connecticut are beginning to come back to life, making more credit available to small companies in the state.
Through the first five months of fiscal year 2010, which began in October, Connecticut’s banks have made 313 SBA loans totaling $74 million. That’s a 76 percent increase from the same time period last year, when SBA lenders made 195 loans for $42 million.
That’s good news for Connecticut’s small businesses, some of which have been starved for capital or hesitant to take on new debt. It’s also a sign that at least some credit markets are beginning to thaw in the state.
SBA officials and bankers say the lending boost is a result of larger loan guarantees and the waiver of loan fees, changes enacted as part of President Obama’s stimulus package in February 2009.
“I think that in many ways things seem to be getting better,” said Bernard Sweeney, district director of the Connecticut SBA Office. “February was the biggest jump in loans we’ve had in a long time. I hope that trend continues.”
The top three SBA lenders in the state so far this year are the Connecticut Community Investment Corp., Webster Bank, and People’s United Bank, each of which has done more than $4.5 million in loans.
The stimulus package passed in February 2009 contained a host of enhancements to SBA programs that were aimed directly at unlocking credit markets.
Among other things, the bill allowed the SBA to suspend the fees it traditionally charges borrowers for its loan guarantees and raises that guarantee from 75 percent to 90 percent for some loans, meaning lenders don’t have to shoulder as much risk.
Money for those extended guarantees initially ran out last year, but Congress has allocated more funds for the SBA on several occasions, and the program now runs through the end of this month.
Sweeney said if the federal government doesn’t extend the program further, however, it could lead to a drop in loan activity.
Robert Polito, senior vice president at Webster Bank’s New Britain office, said the added guarantees have made bankers more comfortable with writing SBA loans.
“Clearly there is an increase in attractiveness of the loans,” Polito said. “While the stimulus is in effect, the bank is at risk for only 10 percent of a deal.”
Polito said the larger guarantee hasn’t changed Webster’s lending standards, which have tightened in the last year and a half, but it could help a borrower who is on the fence, become creditworthy.
“A guarantee is never going to make a bad loan into a good loan, but it can help borrowers get over the hump,” Polito said.
The waiver of SBA fees has also made borrowers more willing to take out a loan, Polito said. The SBA has traditionally charged lenders a guaranty fee and a servicing fee for each loan approved and disbursed. Those fees are passed onto the borrower and are based on the guaranty portion of the loans.
A $500,000 loan, for example, would usually equal a $13,500 fee.
Polito estimates Webster Bank customers saved $350,000 to $400,000 since Feb. 2009 because of the waiver.
Paul Tarsa, owner of the Connecticut Learning Center and Connecticut Enrichment Services, which are student tutoring centers located in Southington, West Hartford, and Brookfield, received a $400,000 SBA term note and $55,000 express line of credit from First National Bank of Litchfield in November
Tarsa said he used the lifeline to consolidate and refinance his company’s debt, and gain access to working capital, which allowed him add 15 to 20 part-time employees, who provide tutoring and supplemental education services to students of all ages and skill levels.
Tarsa said he doesn’t think he would have received the loan without the extended guarantees because his company lacks hard assets and other collateral.
“I don’t think the loan would have been possible otherwise,” Tarsa said.
But while more loans are being made it doesn’t mean access to credit has become totally free and easy. Sweeney said many banks continue to have tightened lending standards and it’s still difficult for many small businesses to access credit. He said micro companies in particular, with 10 or fewer employees, are having a hard time finding financing because they lack collateral and tend to have shaky credit histories.
“The credit criteria remain very tight and difficult for many businesses to adhere to,” Sweeney said. “Banks are looking at credit quality under a microscope.”
Greg Bordonaro is a staff writer. His Financial Sense column appears every other week.
