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Government Guaranteed

By: Kari English

It’s really not that credit standards have changed that much during this recession, there just aren’t as many small businesses making the money needed to pay back a loan right now, in the opinion of Bruce Lammers, chairman and CEO of Ridgestone Bank in Brookfield, Wis. Ridgestone is the largest Small Business Administration lender in Chicago with $30 million in loans backed by the SBA.

“Their sources of down payment and liquidity are somewhat hampered because, years ago, people had appreciation in homes and they would borrow against homes to provide equity for business ventures. It has changed because of the conditions, not just because of tightening credit standards,” Lammers said.

It appears Lammers isn’t the only one who feels this way. In the Federal Reserve’s October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, 35 percent of bankers indicated weaker demand from small firms for the three months prior. However, banks also indicated in the Fed survey that they did tighten standards on all major types of loans to businesses during that same period. Between weakened demand for small business loans and tightened credit standards, how is a bank supposed make loans to small businesses in this economy?

“It’s hard,” said Lammers. “You look at more transactions and it’s hard to find the right deals.”

Ridgestone Bank is a privately held bank with branches in Brookfield, Wis. and Schaumburg, Ill. Founded in 1995, the bank was the 27th largest SBA 7(a) lender in the United States for 2009. Ridgestone Bank has also been recognized as a valued partner by the U.S. Department of Agriculture for its commitment to small businesses, and is currently the number two USDA lender in the United States.

“We have two primary government guarantee products: the SBA loans, which are 7(a) loans, and USDA loans, which are similar to 7(a) loans only they allow you to go much larger,” said Lammers. “USDA loans are for companies that are in population areas of less than 50,000 people. It’s not agriculture. It’s run by the Department of Agriculture but it is for economic development for rural America.”

About 30 percent of what Ridgestone carries on its books is government guaranteed-related debt, according to Lammers. When it makes a loan, it sells the guaranteed portion into the secondary market, and then Ridgestone takes that money and makes another loan and does the same thing over again.

While Ridgestone does provide some non-government guaranteed loans, Lammers said that the bank prefers to find ways to use one of the programs to be able to serve the customer.

“The real thing that these programs do is provide long-term debt for long-term assets for our customers,” said Lammers. “Nobody thought that was important three years ago, when people were handing out money and you could get a loan renewed and you could get a higher advance and a lower rate. But today, long-term debt — where the customer can finance equipment for 12 years and real estate for 25 years and not have to renegotiate in a different credit cycle — is a very good place to be.”

As an example, Lammers said he once had a customer whom he considered to be a shrewd businessman and very capable in his business. But the customer was adamant that he would not provide a guarantee.

“I told him I wasn’t going to do it any other way and I’ll show you how we can do it,” said Lammers. “When I was all done and after closing he said to me ‘the reason I gave you a guarantee on this was because I knew I could perform under the terms that you gave me. I knew that I didn’t have the risk involved having to renegotiate a loan three to five years from now and you gave me enough time to work through any downturns that I might see in my business.’”

Small business lending is very much about making sure the structure doesn’t put the customer in a tough position, according to Lammers.

Many customers outside of the bank’s local market areas use Ridgestone for their business checking accounts because of the relationships they develop during the loan transaction process. “The sheer number of SBA and USDA loans we handle provides us with the unique opportunity to meet people all across the United States. They are often so impressed with how our experienced professionals are able to find customized, creative solutions to their banking issues that they move their entire banking operation to Ridgestone,” said Lammers.

The SBA-Banker Relationship

As with most anything involving the government, people naturally expect a lot of bureaucratic red tape. The SBA is no exception. Lammers believes the red tape that is inherent in the SBA and the USDA processes are part of what makes them safer areas for lenders.

“I have had situations recently where I’ve said to my lender ‘if we had followed the procedures on a conventional loan that we have to follow on an SBA loan this mistake wouldn’t have happened.’ There is a lot of red tape to doing an SBA loan but they are very solid procedures and processes that control risk.”

The SBA has two programs for lenders within its 7(a) loan structure: The Certified Lenders Program and the Preferred Lenders Program. Ridgestone Bank is a preferred lender, which means the SBA delegates the final credit decision and most servicing and liquidation authority to the bank. In the certified lender program, the SBA still makes the final credit and eligibility decision.

“The SBA basically looks at the experience of the people in the bank — if you are going to start up a department it takes a lot of work so you’d probably go out and hire somebody who’s already done it,” said Lammers. “Then the SBA looks at your ability to make credit decisions and your ability to process what you’ve done. As they get more comfortable with how you service loans they give you more authority.

“Because we’re a preferred lender, which means we have national authority to be able to look at a loan request and make a credit decision, we will process it and process the approval internally. Then we send the document to the SBA saying we’ve done this. The down side to that is if we make a mistake then the SBA has every right to second guess us later and say that it wasn’t an eligible loan and therefore we’re not going to honor the guarantee.”

Recessionary Impact

In early 2009, the Recovery Act provided $375 million to increase the guarantee on small business loans and eliminate the fees charged to borrowers in an effort to stimulate this sector. This funding supported $16.5 billion in lending to more than 40,000 small businesses, with borrowers reporting that these loans would save or create more than 450,000 jobs.

“It has made it much better to provide credit to businesses,” said Lammers. “When we look at a credit we still realize that we’re taking a risk and our thought process hasn’t adjusted from the 25 percent retained portion to the 10 percent retained portion. But the customer doesn’t have to pay the guarantee fees. That’s incredible. It allows us to have less exposure on our books, therefore there is less capital that we have to provide.”

Unfortunately, this money is almost completely spent and the SBA has been forced to create a waiting list for awarding the final dollars. Since the creation of this waiting list, the weekly SBA loan volume has plummeted far below its pre-Recovery Act volume. Before the Recovery Act, the average weekly loan volume for SBA loans was $114 million. Following implementation of the Recovery Act provisions, the weekly volume increased to $213 million. But in the first full week of lending following the establishment of this waiting list, only $71 million in loans was approved.

President Obama has signed a bill to provide the SBA with more funds and extend the higher guarantee levels to Feb. 28. But on Dec. 10, Senate Committee on Small Business and Entrepreneurship Chair Mary Landrieu, D-La., and Ranking Member Olympia J. Snowe, R-Maine, introduced the “Small Business Job Creation and Access to Capital Act of 2009,” which would extend the authorization to provide 90 percent guarantees on 7(a) loans and fee elimination for borrowers on 7(a) loans and 504 loans through Dec. 31, 2010, among other things. The bill passed in the committee on Dec. 17.

Lammers said he would like to see the program extended. “It’s a wonderful thing.”

Despite continued weakened demand for small business loans and the tightening of lending standards Lammers is optimistic. “There is more confidence in the economy. Things are improving but it just takes time.”

He is equally optimistic about government-guaranteed lending. “I have seen statistically they [the SBA] do a good job of monitoring the performance of the various parts of their portfolio. It’s hard to say government and entrepreneurialship in the same sentence, but it is a good situation. They have their act together.”

Kari English is associate editor of BankNews.

Copyright © February 2010 BankNews Media