SBA Lending Eases as Economy Expands

Loan volume in the Small Business Administration’s (SBA) flagship loan guarantee program has tailed off locally in the past several years, but that’s not necessarily a bad thing.

Lenders generated $13.6 million in U.S. SBA-guaranteed loans in Grand Traverse County in the fiscal year ending Sept. 30, about a third of the $36.4 million in loans approved in 2011. The number of loans in the SBA’s flagship 7a loan program fell from a recent high of 98 loans in 2012 to 57 loans this year.

Under the 7a program, the SBA guarantees 75 percent of any loss incurred by a lender when a loan goes bad. SBA 7a loans can be used for a variety of purposes, including starting, purchasing and expanding a business.

SBA lending surged at the start of the decade because of special lending incentives in the federal stimulus package designed to help pull the country out of the Great Recession.

“We saw a lot of weakness in the economy coming out of the recession,” said Romualdo Ancog, lead lender relations specialist at the SBA in Detroit. “Banks use the SBA when there are weaknesses in their deals and they need assistance.”

Under the American Recovery and Reinvestment Act of 2009, the SBA was allowed to temporarily waive loan fees and raise its guarantees from 75 percent to 90 percent of loan values. That produced a record level of SBA-guaranteed lending nationwide.

Those incentives have since expired and SBA lending activity is back to what Ancog said are normal levels. SBA lending activity fell slightly from  last year, when local banks approved 62 loans in Grand Traverse County valued at $13.7 million.

Ancog said an improved local economy and stiffening competition among banks for business loans have resulted in less need for banks to rely on the SBA to make deals work.

Plus, SBA loans require more paperwork and approval time, he said. That can be a disadvantage to banks when the economy is humming and banks are trying to close loans quickly.

“We are back to the old days where banks have full-out sales goals and there is pressure to produce lending,” Ancog said. “If they can find a way to do it without the SBA, that’s OK.

But there was a surge this year in SBA 504 loans, which are restricted to the purchasing and refinancing of capital assets, including equipment and real estate. Nine 504 loans totaling $4.4 million were issued in Grand Traverse County in the current fiscal year, up from six loans totaling $1.5 million in 2015.

Loans in the 504 program require a minimum 10 percent down payment. Typically banks fund 50 percent of the loans, with the SBA providing the remaining 40 percent through nonprofit Certified Development Companies (CDC) that are regulated by the SBA. There are nine CDCs in Michigan, including one in Cadillac.

Connie Deneweth, CEO of Traverse City State Bank, said the use of 504 loans has grown as the local economy recovered from the Great Recession. Her bank generated $506,000 in 504 loans in Grand Traverse County in the 2016 fiscal year.

“We’ve done a tremendous number of 504 loans,” Deneweth said. “That is a testament to growth of this little community and the economy.”

That growth is likely to continue into 2017, she and other bankers say, in part because 504 loans can now be used to refinance capital equipment. In May, Congress appropriated $7.5 billion nationwide for refinance loans, doubling the size of the 504 lending program.

“We think that’s going to be a great product for marketplace as we move into 2017,” said Brad Haverkamp, senior vice president of business banking at Chase Bank.

Chemical Bank was responsible for nearly half of all SBA 7a loan volume in Grand Traverse County in the recently ended fiscal year, having generated $6,662,500 in loans.

“We’ve definitely upped the volume considerably in the last year,” said Brad Dyksterhouse, senior vice president and director of business resource lending at Chemical. “We’ve refocused our attention more toward small business lending activity.”

Much of that lending volume was a result of Chemical’s acquisition last year of Lake Michigan Financial Corp., which owned the Bank of Northern Michigan in Traverse City.

“When Chemical acquired Lake Michigan Financial, it acquired a lot of their experience in SBA lending,” Dyksterhouse said. “They had a robust government lending division.”

Chemical Bank’s strong SBA lending activity is a result of the bank’s use of SBA loan offerings as a primary lending product, not as a secondary one, he said.

“We look at a SBA loan as a way of enhancing a deal or making a relatively good deal better,” Dyksterhouse said.
Honor Bank was the second largest lender of SBA 7a loans in Grand Traverse County in the 2016 fiscal year, generating $1.9 million in loans.

Troy Noble, senior lender at Honor Bank, said he started growing the bank’s SBA business about a decade ago when he came there from Fifth Third Bank, where he specialized in SBA loans.

Noble said an origination fee waiver by the SBA on loans under $150,000 has been especially beneficial for Honor Bank’s small business lending business.

“That was a huge plus for us,” he said. “It’s pretty tough when you have a $1,000 origination fee on a $50,000 line of credit.”
The waiver, which the SBA reviews on an annual basis, remains in effect in the current fiscal year, Ancog said.

It’s unclear what impact the election of Donald Trump as president will have on the future of SBA lending programs, he said. Democratic candidate Hillary Clinton proposed expanding SBA lending, but Trump said little on the topic.

“We do not know what this means,” Ancog said. “It’s very much an X factor. We don’t have any idea where he stands on these issues.”