Lowering the volume
SBA-backed loans usually see an uptick when the economy weakens. Not this time

Like the economy, SBA loan activity has sagged. The number of loans made in Massachusetts through the U.S. Small Business Administration's flagship 7(a) loan program is down more than 30 percent so far this fiscal year from the same period last year, while the dollar volume is down more than 10 percent.

According to the SBA, there were 593 loans totaling $74.3 million made between Oct. 1 and Feb. 29. The figures for the same period a year ago were 873 loans totaling nearly $84.8 million. Nationally, the number of loans made through 7(a) is down 14 percent so far this fiscal year.

Banks usually make more SBA-backed loans when the economy weakens. When credit standards tighten, lenders typically steer more small businesses to SBA loans. The government guarantees on these loans, which range from 50 percent to 85 percent, enable banks to make loans to businesses that don't qualify for conventional loans.

This downturn is different. Uncertainty over where the economy is headed might be one reason more small businesses aren't turning to the SBA.

Some lenders have tightened credit standards even for SBA loans, said Eric Zarnikow, who heads the SBA's Office of Capital Access.

SBA lending also has become less attractive as fees for the program go up and prices for loans on the secondary market go down. Nearly 400 banks have stopped making SBA loans over the past two years.

"There's definitely some hesitation on the part of small businesses (to take on more debt). And some banks have told me they've tightened their standards, they're looking to get as much collateral as they can," said SBA district director Bob Nelson.

Officials from both the banking and the small-business sectors said they're hoping for a turnaround. Bankers said they're willing to make deals and are working with their small-business clients to find loans that fit their needs.

"We want to lend money, and if the SBA allows us to do that, we're going to do that," said Jim Hanlon, vice president of SBA/government lending with Sovereign Bank.

Like most banks, Sovereign recently saw a decline in activity -- a sharp one. It went to $3.8 million in fiscal 2008 from $6.8 million in fiscal 2007.

"In my experience I'm busy in the good times and the not-so-good times. It's the uncertain times when it's not so busy," Hanlon said.

The past several months have seen a great deal of uncertainty, with fallout from the subprime mortgage crisis, predictions of recession and the upcoming presidential election.

Yet bankers say the SBA figures don't represent or foretell any sort of crisis in business lending.

"You shouldn't use that one period to estimate what the rest of the year is like," said Jonathan G. Sloane, co-president and co-CEO of Century Bank & Trust Co., whose SBA loan activity dropped to $618,900 from $2.2 million.

Sloane cited economic uncertainty along with the aftermath of the subprime market collapse for a drop-off in activity starting midyear last year and continuing through the winter.

"People were reticent to expand their business. But we've seen a change in mentality since early February. People aren't becoming bullish, but they are much more interested in expanding and growing their businesses," Sloane said.

Walter Manninen, senior business advisor with the Salem State College Small Business Development Center, said many small businesses are finding it more challenging to get loans right now. He said many startups don't have the assets that banks now want to see before approving loans. Also, entrepreneurs who might have used their homes as collateral are finding that, with the slump in the real estate market, they don't have enough equity to secure a loan. And even well-established, profitable service firms are coming up short when it comes to assets because of the nature of their businesses.

"The banks are challenged. The industry is going through a tough time right now, so it's prudent for them to look at their risk. But at the same time asset-based lending is putting pressure on small business," said Manninen, a former banker. "It is making it more difficult for small businesses to get the funding they need, even with programs like the SBA in place."

Nelson said the SBA wants to drum up activity and plans to meet with bankers over the next two months to educate and promote various 7(a) loan programs, such as the year-old Patriot Express that features guarantees of 75 percent and 85 percent, depending on the loan size.

Some banks are already experiencing an uptick in lending.

TD Banknorth, for example, saw its 7(a) lending increase from 44 deals totaling about $2.6 million during the first five months of fiscal 2007 to 51 deals worth nearly $7.9 million for the first five months of fiscal 2008.

Marianne Byrne, the bank's SBA manager, said TD Banknorth has not changed its lending standards. Rather, she credited the bank's overall approach as well as its ability to offer all the SBA products to the uptick.

"We take the opportunity to look at every applicant with an SBA enhancement," she said.

Kent Hoover, Washington bureau chief for American City Business Journals, contributed to this report.