Banking & Finance Quarterly – Slowing Surge

Lenders are starting to see the first significant drop in demand for Small Business Administration loans from post-pandemic highs, though the volume remains well above pre-pandemic lows.

Jennifer Davis, senior vice president in charge of Southern California operations at the Oakland-based TMC Financing placed the start of the decline of about the time the Federal Reserve Board began raising rates in the spring. Business owners with fresh memories of the last financial crisis are understandably guarded at signals of uncertainty, Davis said.

“Even then, there was a point where things were still going up from a volume perspective. But that volume started trickling off as the interest rate has been increased. I’d say it dropped off around 50% (from its peak) over the summer, when we started really feeling it,” she said.

Davis also acknowledged the preponderance of economic triggers – such as interest rate hikes and a decline in economic growth – that strongly signal a coming recession. Barbara Morrison, TMC’s founder, took it a step further by suggesting the slump has already arrived, if unofficially.

“One thing economists are loath to say is that we’re very likely in a recession now, and what they’re hanging their hats on is the employment rate. Everything else points to it, (and) whether or not it’s a recession by now is just a technicality for the economists,” said Morrison.

Refinancing now

Whether the recession’s here or on the horizon, Davis said the current market is providing an incentive for SBA 7(a) loan holders, the general assistance loan program most commonly utilized by small businesses, to refinance into a fixed rate.

Applicants have increasingly seen value in SBA 504 program loans. Davis said 504 loans are a viable fixed-interest financing option for businesses looking to purchase commercial real estate they’re looking to expand into or even already renting, and money can be put toward equipment and construction costs.

The program allowed Bill and Leila Hall – owners and operators of the Paramount-based Hart Food Products Inc. – to secure new financing through TMC. Bill Hall said the loan is allowing the company, a producer of low-cost frozen foods, to move forward on expansion plans.

Bill and Leila Hall of Hart Food Products. (Photo by Ringo Chiu)

“The current lending environment is fantastic,” said Bill Hall, noting that his company had previously taken advantage of 504 loans, in the wake of the 2008 financial crisis. “We are already looking at securing a fourth SBA 504 loan to expand to another location. The interest rates are better, the down payment is lower, and it is a better experience through and through.”