At a recent meeting with Frank Burke, right foreground, who was representing Senator Frank R. Lautenberg’s office, South Orange business leaders discussed the need for credit. From left, Carole Anzalone-Newman of Main Street South Orange; Brian Boele of Bonte; Terrence Brooks of Vision Barber Salon; and Evelyn Lee, a reporter from NJbiz.com.Joanna D’Angelo knows that starting a new business is no small accomplishment. Dealing in fine organic tea and jams from France, Ms. D’Angelo set up Tea Together, her storefront in Millburn, last November.
“We felt it was an up-and-coming area, and it was right for us,” Ms. D’Angelo said.
Business has not been bad, but she needed a small loan to keep momentum going until the busy season. While shopping for loans last month, Ms. D’Angelo walked into Chase, a preferred lender of loans backed by the federal Small Business Administration, and walked out a short time later — minus any money.
“We tried a few other banks, but they all had impossible conditions,” she said. “We did not qualify for an S.B.A. loan, something they were very adamant about.”
According to Ms. D’Angelo, Tea Together failed to qualify at Chase because the business was fewer than three years old, though she did not know if that was the Small Business Administration’s or Chase’s rule.
Ms. D’Angelo joins other owners of small local businesses who are finding credit hard to come by, even with the help of federal stimulus money directed to help. The dearth of small business loans nationally described in The Times’s article on Thursday seems to be playing out locally as well. So far in South Orange, only four S.B.A. loans have been approved from Oct. 1, 2008, through the end of June 2009, according to federal statistics. This is down from eight loans in the last financial year, from Oct. 1, 2007, and Sept. 30, 2008.
An S.B.A.-backed loan is intended for small businesses that might not qualify for a commercial loan. After being rejected, a small businesses can apply, often at the same bank, for an S.B.A.-backed loan.Since the financial crisis began in September, the credit market dried up, hitting small businesses hard. In response, $730 million from the federal stimulus package was funneled to increase the guarantee on S.B.A. loans to 90 percent. However, even with the guarantee, loans can be hard to come by.
But who is responsible for the bottleneck? Is it the S.B.A., where mountains of paperwork are required? Or are the banks not wanting to go the extra mile to assist small businesses? Or perhaps, are small businesses considered a poor investment?
From the eyes of the banking industry, the problem centers around the red tape that entangles all areas of the S.B.A. loan process.
Sheila Spangler, who worked in the banking industry for more than 20 years and is now a business strategy coach, said she believed that banks are not lending because of the excessive paperwork required for an S.B.A. loan. Banks and the S.B.A. have their own qualifications, and both apply when a small business wants a loan.
“Just because the S.B.A. may be willing to guarantee the loan, the bank may not necessarily want to make the loan,” said Ms. Spangler, who calls herself a proponent of the federal agency.
She explained the S.B.A. guarantee is not real money. It is available only if the borrower defaults, so the bank must initially provide its own money for the loan. And when it comes to receiving the guarantee, from her own experience and from being in constant contact with bank managers, Ms. Spangler said it can take one or two years.
“It is a long, drawn-out process,” she said.
Furthermore, if the borrower defaults, there is also a chance that banks will not get their money back from the S.B.A.
“If the bank does make the S.B.A. loan, the package has to be done perfectly, or the bank risks not being able to exercise the government guarantee,” Ms. Spangler said.
Jonathan Swain, a spokesman for the Small Business Administration in Washington, countered that it did not take terribly long for a loan to receive a guarantee.
“We have made a commitment to lenders to turn their application around in 45 days or less,” Mr. Swain said, referring to the amount of time it takes banks to receive the guaranteed amount for a defaulted loan. He said the S.B.A. averages a 30-day turnaround, and that 95 percent of the guarantees on default loans are paid to banks.
Mr. Swain also noted the low default rate on S.B.A. loans in the first place.
“Our default rate is about 5 percent,” he said, “which is more than what it was historically. However, that is what you would expect in this economic time.”
A new initiative of the S.B.A., America’s Recovery Capital Loan Program, is also causing confusion for some would-be lenders. Operating for less than two months, this program provides $35,000 in short-term relief to struggling small businesses. Like in a standard S.B.A. loan, the business must be eligible by the standards of both the S.B.A. and the commercial lender.
“Over 1,000 A.R.C. loans have been offered across the country,” Mr. Swain said. “We feel good about where it is, and we expect to see those numbers go up.”
But so far, only four of those loans have been in New Jersey through the lenders JPMorgan Chase & Company, PNC Bank and Woori Bank. (They tend to head to businesses in Minnesota, Wisconsin and Iowa, according to The Boss blog.)
While there are 190 banks in New Jersey that partner with the S.B.A., some are part of the preferred or certified lenders program, and are able to get an accelerated application process for loans they approve. Here is a list of those banks [pdf].
Ms. Spangler said A.R.C. provides little incentive for commercial lenders to administer the loan.
“The mound of paperwork and knowledge is the same as for a million-dollar loan,” she said of the relatively small A.R.C. loans.
Mr. Swain said this was necessary to prove that the business was viable and still a good investment.
Elizabeth Boele, co-owner with her husband, Brian, of Bonte, a cafe and waffle shop on South Orange Avenue, was not granted an A.R.C. loan because she could not demonstrate financial difficulty on paper, a qualification for the loan. Instead, the business had been cutting back in other areas to avoid defaulting on other loans.
“If we had not been making our repayments, we would have been better off,” Mrs. Boele said she told an S.B.A. representative recently.
Mr. Swain encouraged business owners like this to speak with the New Jersey S.B.A. office, as options still might be available to them.
There are some who argue that market forces, not the government, should determine who stays in business. While the S.B.A. loans may be helpful, are they keeping people afloat who simply should sink?
“Small business that are barely making it should not get a loan,” said Mary Anne Spencer, from the Tenth Muse Gallery in Maplewood, who was able to use her own equity to start her business. “People are going in with no business plan, no demographic study … what are you going to give them a small business loan for?”
Ms. Spencer was concerned for those small businesses that were barely breaking even, operating under false hopes that the economy will suddenly improve, and taking on the added burden of new debt.
“People’s spending has changed, and it is going to stay that way for some time,” she said.
When this thought was posed to Mr. Swain, he said he believed that many of the businesses the S.B.A. supports have been profitable businesses that need an extra hand.
“There are a lot of good, viable small businesses who do not have access to the capital that they would have had in good economic times,” he said. Mr. Swain said S.B.A. loans were useful to businesses that were in the “maybe stack” of getting a commercial loan, and he stressed the loans were not there for businesses that are not viable.
Mr. Swain did have some good news for small business regarding the dollar amount of S.B.A. loans recently. Since February, “we have actually seen our loan volume increase 50 percent,” he said. “July was the highest months in terms of volume since last September.”
Source: NYTimes
