Northern Michigan’s SBA Loan Boom” Is the party over, or just getting started?

REGION – Throughout much of the recession, at least one economic indicator in the northern Michigan business scene has been off the charts: the number of SBA loans.

Bolstered by on-again, off-again stimulus measures, the number of loans guaranteed by the U.S. Small Business Administration has risen sharply across the region and the state. In part, bankers are crediting incentives that Congress has packed into the SBA loan guarantees as a counter-measure to the recession.

The party could soon slow down with the expiration of special SBA incentives that was scheduled for the end of last month. Then again, it could start rolling all over again. Congress has already let the incentives, including expanded loan guarantees and the elimination of loan fees, lapse twice, only to resurrect them within weeks.

"We're hopeful that the stimulus will be approved for the duration of the year," says Doug Wolf, the president of JP Morgan Chase's Northern Michigan market.

It's easy to understand why. With the help of the incentives, the SBA has doubled the rate of guaranteed business lending in Michigan, says Dick Temkin, the SBA's Michigan District director. "We went from roughly 15 loans a week to roughly 29 loans a week," he says.

Statewide, the SBA loan total stood at $182 million at the end of February, just five months into its new fiscal year. That puts SBA loan activity for Michigan on a pace to exceed last year's level by about 80 percent.

The lending has been picking up at local banks, too. "Our SBA applications are up about tenfold, both in this market and nationally as well," Wolf says.

The increase coincides with an uptick in loan demand and a Chase push to expand its business lending, he says.

To take advantage of the incentives, Wolf says his office has been trying to offer "an SBA alternative with just about every loan application we are looking at."

Doug Buck, team leader for business banking at Fifth Third Bank in Traverse City, says his institution "is certainly making SBA loans more frequently than we did before."

Meanwhile, MBank's SBA loans hit $10.7 million for the first five months of the U.S. fiscal year, compared to $13.2 million for all of the year before. At the end of February, Northwestern Bank was on a pace to surpass its performance for the fiscal year ending Sept. 30, 2009.

With rare exceptions, the SBA doesn't lend money directly. It relies on banks and private lenders to make the loan, and then guarantees a portion of it. To some extent, these guarantees have been successful simply because they generate confidence in lenders. There is nothing like a pledge that a large part of a loan will be repaid to loosen a lender's purse strings.

And thanks to the beefed-up SBA incentives passed last year, borrowers haven't even had to pay loan fees in key loan categories. (The SBA normally uses those fees to help support its program.) Congress's stimulus measure also helped out by raising the maximum guaranteed portion of a loan to 90 percent for certain types of loans.

When new twists in SBA lending began getting publicity last year, the business community began showing more interest in it, says Lori VanAntwerp, assistant vice president at Northwestern Bank. "We have had more people coming in and specifically asking for the program."

Many companies are refinancing existing debt with the SBA program, Buck says. In the past, it might have been a borderline decision to use an SBA loan in this way. Normal fees as high as 3.5 percent of the loan amount could outweigh the benefits of a lower interest rate, lower payments and a longer term.

But with the waiver of the normal fees, refinancing began to make sense for some businesses. "Those fees can add up to thousands of dollars for the borrower," VanAntwerp says.

The new SBA measures ran out of money for brief periods last fall and this winter. After lapsing in February, the program was extended to March 28. Congress is now considering an extension until the end of the year. And businesses are lining up for the deals again – as they did during two previous breaks in the program.

"What may or may not happen with that legislation remains to be seen," says the SBA's Temkin. "But we are hopeful."

Even without waived fees, the SBA guarantees are a big help to banks and businesses. The so-called 7(a) program covers the most common form of lending. Relatively young firms often use 7(a) loans to buy real estate or equipment or provide working capital, Buck says.

The guarantees don't tip the scales enough to induce a bank to make a bad loan, he says, "But it can make all the difference if you are looking for just a little bit more to help a loan out."

With the loan guarantees, banks are also comfortable lending over a longer period, "A bank might normally want the loan for a piece of equipment to be paid back in five years," Buck says. With a guarantee, the loan officer might contemplate going 10 years. The borrower benefits from a lower rate.

And that could mean the difference between weathering the next downturn successfully – or not weathering it at all. BN