Decline in small business lending has bottomed out says SBA report – Now what?

As published in The Star-Ledger Stacy Jones points out the fall of small business lending led by the recession has finally leveled off.

A decrease in the amount of SBA funding has diminished in the current year. A study conducted by the SBA showed the number of small business loans made in 2013 has grown . Various banks have also noted that they are maintaining improved capital levels. More borrowers from a variety of industries are showing an increasing interest in getting an SBA loan however hospitality businesses are still having an inherent weakness.

Decline in small business lending has bottomed out says SBA report – Now what?

The nose dive that plagued small-business lending during and after the recession has finally leveled off according to a new report from the U.S. Small Business Administration’s Office of Advocacy. Small-business loans had been growing steadily and hit $711.5 billion in 2008 before tumbling into a five-year decline.

American banks reported $587.8 billion in outstanding business loans of $1 million or less in June 2012 showing a $19 billion drop since the previous year according to the new SBA report. Lending in 2012 fell short of pre-recessions levels by $124 billion. It needs to increase by 17.4 percent before it makes a full recovery.

“While overall small-business lending continues to decline we are not seeing the sharp decline we saw in recent years or the extreme decline we saw in 2008” said Winslow Sargeant chief counsel for the SBA’s advocacy office. “More importantly the study shows an increase in the number of small business loans more loans going out the door which underscores the positive turn in our country’s economic landscape.”

The SBA study — which uses quarterly reports filed by financial institutions to compare small-business lending with total assets — scores and ranks institutions.

American Express First Citizen Bancshares and Wintrust Financial topped the nationwide list in 2012. Cornerstone Bank in Moorestown 1st Constitution Bank in Cranbury and BNB Bank in Fort Lee topped a similar list compiled for New Jersey institutions making small business loans.

The administration was careful to point out that the data have their limitations. Although Cornerstone Bank topped the list it might not be the best fit for all capital-hungry small businesses.

“Banks have different business models. Some of our members are more traditional savings banks and their business model focuses on deposits from consumers and lends to consumers in the form of residential mortgages” said John McWeeney president of the New Jersey Bankers Association. “Other members are more business oriented and do a lot of commercial and industrial lending. A lot of our banks involved in commercial lending make commercial real estate loans for small commercial properties rentals and offices.”

Members have been telling McWeeney that loan demand remains soft in part because of impending health care reform.

Two weeks ago the White House pushed back the phase-in of Affordable Care Act requirements that small-business owners with at least 50 employees offer workers health insurance or pay fines. “In this environment there’s a hesitancy to do things based on the economic environment and changes in health care and what that may do” he said. “It’s been delayed but it’s still out there. It still looms and I think it’s still very much on the minds of small-business owners.”

Banks have been telling the association’s president that they are flush with deposits and maintaining good capital levels. Going forward McWeeney said business lending will become more popular because banks need to diversity their portfolios to spread their risk across more categories.

At Magyar Bank in New Brunswick lending has started to pick up again said senior vice president Bob Bechtel.

He was brought on four years ago to head up the company’s involvement in SBA small-business lending programs like 7(a) loans which are the bank’s bread and butter.

The SBA guarantees 7(a) loans which are capped at $5 million. Businesses approved for the program last year borrowed an average of $337730.

At Magyar the average loan amount was slightly lower about $250000 for 20 borrowers the bank approved through the program last year. Bechtel chalks that up to borrowers being more debt-averse after the recession.

Magyar lends to the entire state but deals primarily with customers in its own backyard.

“We get a little of everything offered around here: Food businesses eateries industrial light industrial companies” he said. “If I had to pick a category that still had inherent weaknesses in recent years — although it’s starting to change — it’d be the hospitality businesses.”

Depository lenders like Magyar account for about 60 percent of small-business borrowing according to the SBA. The remaining 40 percent come from finance companies brokerage firms family friends and other businesses.

Some of those finance companies like crowdfunding platforms and microlending nonprofits are not yet tracked by the SBA.

“It’s definitely something that’s on our radar” said Sargeant counsel for the SBA advocacy office “and we will definitely keep our eye on it as a potential contributing factor to changes in the small business lending environment.”

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