Small businesses in search of capital for cash flow and growth went from a relative feast in 2007 to famine in the recession and aftermath. The slow recovery has not brought a return to the good old days. Even as loans have become more available, the standards are tighter than they were before the 2008 financial crisis.
That shift has helped Wells Fargo Bank increase its market share of small loans to businesses in Orange County even though it also cut back its lending activity, according to reports banks file with the federal government.
From 2008 through 2010, Wells Fargo reduced loans of less than $1 million to Orange County businesses by almost a third. But it strengthened its position as top lender because other banks cut their local lending even more: Bank of the West curtailed local small-business loans 56 percent; JP Morgan Chase, 77 percent; and Citibank, 78 percent, according to Community Reinvestment Act -- CRA for short -- reports.
In some Orange County census tracts small-business lending plunged 93 percent from 2007 to 2011, the latest data available, according to a Register analysis. The trend coincided with a period of high unemployment, declining real estate values and soaring bankruptcies for the local economy.
"Five years ago, it was fairly easy (for a business) to get a line of credit. Business owners used their homes as collateral. Those loans have dried up," said Santa Ana CPA Ron Stumpf, chairman of the Southland Economic Development Corp., which works with small businesses and lenders in the federally guaranteed 504 loan program. "If your business has a loss and a marginal balance sheet, it is difficult to get loans."
Congress passed the Community Reinvestment Act in 1977 to encourage banks to make more loans in low- to moderate-income neighborhoods, so these reports measure only a slice of all financing to businesses. The Register analysis was of bank loans of $1 million or less to businesses.
Wells Fargo dominated this segment of business loans in Orange County even before the financial crisis. Its $1.1 billion in business loans under $1 million in 2006 was three times more than the second biggest lender, American Express, which makes credit card loans. By 2011, Wells Fargo's $827 million in loans was five times more than second-place Union Bank.
Wells Fargo did not change its underwriting standards for loans during the credit freeze, said Orange County Regional President Ben Alvarado. What changed was businesses' cash flow and ability to prove they could repay the loans.
But many banks sharply curtailed small-business lending from 2006 to 2010, even when the federal government guaranteed a portion of the amount borrowed, according to a study by MultiFunding LLC, a business lending adviser. During that period, the 25 largest U.S. banks increased total deposits by 61 percent to $5.8 trillion, yet their approved loans under the Small Business Administration's 7(a) program declined 4 percent to $3.6 billion.
Recently, SBA Administrator Karen Mills touted the fact that 13 big U.S. banks have made $11 billion available for small-business borrowers. But the Financial Services Roundtable, which represents these banks, says businesses have tapped only a small portion of that money and that most of it was made available as credit cards.
"That means a significant portion of the $11 billion they are bragging about comes from the millions of small businesses who use credit cards for convenience or to earn cash back or frequent-flier points, not as capital to build their businesses," said MultiFunding founder Ami Kassar. "It remains difficult to determine whether these banks have really done anything to make credit more available to the small businesses that need it."
The CRA reports do indicate that many banks increased their Orange County business loans under $1 million in 2011. JP Morgan Chase loaned $83 million, a 54 percent increase from a year earlier; Bank of the West loaned $64 million, up 14 percent; and Bank of America loaned $163 million, up 9 percent. Wells Fargo's $827 million in small-business loans was down 0.7 percent.
Banks of all sizes are competing for the most credit-worthy businesses, said Tom Markel, founder of iBank, an Internet matchmaker for borrowers and lenders. The website gets 1.7 billion postings each month by people and businesses seeking a loan. Markel estimates that 30 percent are cream of the crop, 30 percent are suitable only for asset lenders and the middle 40 percent have some flaws and struggle to get financing.
Banks used to consider a combination of a business's ability to repay a loan, its collateral and how much the borrower put into a deal, he said, but when loans started being bundled and sold into the secondary market, "lenders got stupid everywhere -- mortgage, auto loans, business loans. Since the financial crisis, we're back to (more cautious) lending."
Steve Stultz, owner of SBA lending consultant Stultz Financial in Newport Beach, agreed. "Everybody is being more careful making loans now, partly by design, partly because regulators are looking more closely at banks.
"I wonder if more loans to small businesses are a good idea anyway," he added. "If (owners) don't have a business background, maybe they shouldn't get a loan."
Many banks are re-entering the small-business market, but the most creditworthy businesses can shop around for a financially stronger bank offering lower terms. Me and My Big Ideas, a craft and scrapbooking products company in Lake Forest, last year switched to Wells Fargo from a community bank where its accounts had been since its founding in 1998, said company Chief Financial Officer Kevin Fleming.
"I think there's a place for community banks (but) we were concerned about the health of our bank, and it had a service charge for international payments," Fleming said, adding that Wells Fargo offered the convenience, competitive rates and services Me and My Big Ideas wanted.
The company recently got a $1 million working capital line of credit with Wells Fargo at interest rates lower than the previous bank charged, he said. "The company has a strong balance sheet and has been profitable every year since it started...so we didn't have (financing) issues during the financial crisis."
Me and My Big Ideas is a good customer, but Wells Fargo's Alvarado stressed that his bank has invested in programs and personnel to make the less-than-perfect small-business loans. "We have a 'Second Look Program' (in which) we have invested in our banking team so if a loan request has fallen through the cracks it gets another look. We added 16 people in Orange County in 2011."
Wells Fargo isn't the only bank beefing up its business banking staff. In 2011, Bank of America said it was hiring 34 small-business bankers in Orange County, part of its push to add 1,000 people nationwide.
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