Tightened credit markets and economic uncertainty have caused loans from U.S. Small Business Administration lenders in Connecticut to decline rapidly over the last few years, forcing some businesses to look elsewhere for their financing.
In 2006 and 2007, the Connecticut chapter of the SBA issued $239 million and $189 million in loans respectively. In 2008, that number dropped to $183 million. And through the first nine months of FY 2009, the loan amount is only $80 million, a 41 percent decline over the same time period last year when $136 million in loans were made.
“It’s largely due to the economic times,” said Greta Johansson, deputy district director of the Connecticut SBA chapter. “Loan volume has declined steadily since 2006.”
Data on the amount of conventional loans originated by Connecticut banks during the previous nine months was not available by press time.
Experts say there are various reasons for the steep drop off of SBA loans, but none more important than the pullback or withdrawal of some large lenders who historically participated in the SBA programs at significant levels.
New Jersey-based CIT Small Business Lending Corp., for example, was the state’s largest SBA lender in 2006 when it made $31 million in loans.
So far this year, however, it has not originated a single loan in Connecticut.
RBS Citizens Bank, which made $20 million in SBA loans in 2006, has made only $1 million in loans so far this year.
“It’s been a very interesting and tough six or seven months,” said Chris Reilly, president of CIT Small Business Lending Corp., which had been ranked as the No. 1 SBA lender in the country since 2000.
“SBA loans should have filled the gap left by big banks, but it didn’t happen. Lending just fell off a cliff.”
Reilly said since CIT is a non-bank lender, it relies on the secondary market for liquidity, which means it needs to sell SBA loans it originates in order to maintain sufficient cash flow.
But as the financial crisis took hold, the secondary market became nearly nonexistent, forcing CIT to stop making loans in Connecticut and elsewhere.
“It had a dramatic impact on our ability to make loans,” Reilly said. “Pricing was in the trash can for months and there was no way we could sell loans at those discounted prices. If we couldn’t sell them we couldn’t originate them.”
Reilly said secondary markets have begun to thaw in recent months and that “CIT is committed to SBA lending.” She said CIT has seen its loan demand increase recently and she expects the company to make loans in Connecticut by the end of the year.
Citizens Bank spokesman Christopher Riley said national and local economic conditions in the first half of the year have been challenging but the bank remains “committed to small businesses” and always does what best for its customers.
“Sometimes that’s an SBA loan and other times a conventional business loan is the right fit,” he added.
During the retreat of larger lenders Johansson said small, community banks have become more active in SBA loan programs but they aren’t filling the vacancy left by big banks.
The top three SBA lenders in the state have made $23 million in loans so far this year compared to $74 million in 2006.
Another problem is that small business owners, like consumers, are delaying unnecessary borrowing in hopes of waiting out the recession, said Robert Polito, senior vice president at Webster Bank’s New Britain office.
Polito said during uncertain times there is a lot of conservatism among businesses, which means they aren’t eager to invest in business expansion or capital improvement projects.
“The business climate has not been good,” Polito said. “People don’t want to expand and borrow when they aren’t confident.”
Some banks have also tightened lending standards, which means it could be harder for some businesses to qualify for loans.
Despite the bleak numbers, there is a sense of optimism that SBA lending in Connecticut will improve over the next few months.
That’s because the stimulus package passed by the Obama administration contains a host of enhancements to current SBA programs that are expected to help unlock credit markets.
Since Feb. 17, when the stimulus went into effect, financial intuitions in Connecticut have made $43 million in SBA Loans, compared to $37 million in the previous four month period, an 18 percent increase.
Among other things, the bill allows the SBA to suspend the fees it traditionally charges borrowers for its loan guarantees and raises that guarantee from 85 percent to 90 percent for some loans, meaning lenders won’t have to shoulder as much risk.
Johansson said the reduction in fees has already saved Connecticut borrowers $890,349.
The stimulus also offers up to $35,000 in interest-free loans, and has opened up eligibility criteria for what constitutes a small business, Polito said.
“Just about everyone is eligible now,” said Polito, who added that SBA loans make up about 13 percent of Webster Bank’s small business lending portfolio. “These changes will bring heightened awareness that these loans are available.”
Polito said Webster Bank has seen an increase in demand for SBA loans in recent months and that he’s adding a staff member to meet the work load.
Johansson said that is a good sign, and if the loan volume isn’t there yet in the state, SBA is “well positioned to meet the need whenever it does picks up.”
Reader response:
“We tried getting a small business loan at the beginning of the year so I could feel comfortable hiring an employee. One of the banks mentioned here declined our SBA loan. I know I’m just a really small business, but adding one employee is still a new job in CT.
Where’s the stimulus money, I don’t see it? I don’t know anyone who has. The money seems “stuck” in the banks and it’s not getting to those who need it. All I see is that I’m in a Catch-22, banks and credit card companies are tightening their requirements and lowering any available credit one might have (to “limit” risk), forcing credit scores to go down. One company lowers their available credit, which in turns causes others to lower theirs. It’s a chain reaction.
I have an established business that has been in business for 10 years. I’m looking to grow, I have projects and can’t get the capital to make it happen. I’ll bet I’m not alone…” — Matthew Greger, The Business Helper Inc.
