The dark ages of small-business borrowing could be nearing their end, as bankers forecast a coming renaissance in the local commercial-loan climate.
Those predictions come courtesy of the federal Jobs Act, a September law that boosts U.S. Small Business Administration loan guarantees through Dec. 31, with additional provisions set to make refinancing of underwater commercial properties easier in 2011.
"This is going to make a big difference in our world," said Barbara Morrison, president and chief executive officer of The Mortgage Capital Development Corp., a California company that makes SBA-backed real estate loans to Las Vegas businesses. "It allows us to make loans to larger companies, and it allows us to make larger loans in general."
But observers disagree on just how much the new rules will melt the small-business credit freeze. Some lenders say they expect brisk borrowing activity in coming months, even as a local SBA official foresees sluggish demand for loans in the new year.
"I'd like to think we'll pick up (lending volume) in 2011, but I truly wouldn't bet on it," said Ed Brown, finance chief for the SBA's Nevada district. "I can't say things are changing that tremendously in this area. I don't see where our economy has thawed or our lending has become better."
Here's why bankers take the opposite view: Those new rules in place through the end of 2010 increase federal loan guarantees from their prior 75 percent to 90 percent and waive fees for borrowers on the SBA's 7a loans, which businesses use to purchase new equipment or make capital investments for growth.
And in early 2011, lenders expect fresh regulations to kick in on the SBA's 504 loans, which fund commercial real estate purchases and refinancings. The 504 rules will expand the allowable net worth of a borrowing business from $8 million to $15 million, and they'll also let lenders loan up to $5 million on a second mortgage, as opposed to the previous $2 million limit.
So it's no wonder Morrison and other lenders expect small businesses to emerge from their bunkers in search of expansion capital.
Morrison said her company, which serves California and Las Vegas, has already financed 45 percent more businesses in 2010 than it helped in 2009. Texas financial consulting firm Terry & Associates said an October survey of its banker clients revealed that nearly 70 percent of SBA lenders will increase their loan volumes, with 35 percent saying the expected to increase business by at least 25 percent. And Adrien Burney, senior vice president of SBA lender Nevada State Development Corp., said the third quarter brought a level of loan inquiries and client meetings that the agency hasn't seen since 2008.
"It's a very hopeful sign that business owners are starting to say, 'I've sat on the sidelines long enough, and now I'm going to get into the game," Burney said.
But the cash infusion raises the question: Just how much pent-up local demand is there for small-business loans? Are area businesses just dying to expand, but can't do so for want of capital? Or are they actively dodging borrowing because they're leery of new debt as long as sales remain off of their prerecession levels by as much as 50 percent?
To hear Jeff Grace tell it, it's both.
Grace, president and chief executive officer of local information-technology consulting firm NetEffects, recently obtained pre-approval on his first-ever SBA loan, a 7a credit line worth around $200,000. Grace's idea is to line up financing should he unexpectedly come across an irresistible acquisition target that would help him quickly expand NetEffects, a 13-employee company that earns about $1.5 million a year in revenue and has always financed its growth through company cash flow.
But Grace has yet to actually borrow the money.
"Given the poor economic conditions, there are a lot of good deals to be had, but because of the uncertainty of the economy, I'm reluctant to take on debt," Grace said. "It's a dilemma I haven't fully reconciled."
Bill Spohrer, director of administration for the local law firm of Jolley Urga Wirth Woodbury & Standish, said that's the prevailing narrative he hears from the banks he works with. Yes, there's unrealized loan demand, as businesses have long had trouble qualifying to borrow. More often than not, though, bank officers tell Spohrer they have money to lend; they just don't have borrowers who want financing. That's likely because smaller operators continue to fret over future business conditions, he said.
"The fact that there's tons of money floating around out there, in my opinion, is not going to motivate people to borrow," said Spohrer, who arranged financing for his firm in 2009 to maintain a working-capital line of credit and buy office equipment. "There are uncertainties about tax rules and federal regulations, and a lot of businesspeople are saying, 'You know what? We're holding our own and we're showing a pretty good bottom line.' They're able to meet the demand that's been presented to them, and they're making money without having to borrow to do it."
Plus, the newly available SBA funds don't necessarily match businesses' biggest needs these days, said Roland Newkirk, president and chief executive officer of Advisigence, a Las Vegas consulting firm that helps businesses work with banks on servicing existing loans and applying for new ones.
What most companies need today is a line of credit for working capital to help cover payroll and lagging collections. But SBA loans cover expansion-related investments such as new equipment or office space. So there is pent-up demand for loans, Newkirk agreed, but not for the types of loans that have become more available.
Morrison agreed that Las Vegas claims plenty of companies that won't take advantage of the new SBA lending regime.
"There are many, many businesses where the last thing they want is more debt. They can't service the debt they have," Morrison said. "All they want to do is survive the next 12 months."
Still, she said she senses lots of unmet demand for loans among small companies that weathered the recession and now want to grow. The Mortgage Capital Development Corp. saw a 56 percent jump in local SBA loan approvals in the quarter that ended Sept. 30.
Tim Terry, president of Terry & Associates, said Nevada has seen significant recent increases in loans to small businesses, a trend he expects to continue at least until the end of the year.
Marisa Rodriguez and Sergei Shapoval can both attest to big potential demand for small-business loans.
The engaged couple run Sergei's Dance Studio in southwest Las Vegas. The 2-month-old business needed to borrow to get off the ground, but it couldn't qualify for an SBA loan, said Rodriguez, the company's director of finance and a former loan officer specializing in small commercial loans. Banks told the pair they weren't interested in lending to anyone but professionals such as doctors and attorneys, so Sergei's Dance Studio turned to private investors instead.
"Businesses do want to get loans. Most business owners, especially small-business owners, are in business because they have a passion, and they're doing what they love," Rodriguez said. "But when you ask for a loan, banks want to see your last two years of sales, and because of the economy, sales have not been as good as they were in the past for a lot of people. They're just unable to get financing."
So count Sergei's Dance Studio among the companies that intend to chase SBA lending. Sometime in the next year or two, Rodriguez said, she and Shapoval will look at refinancing their existing debt, or perhaps even expanding the studio if business is good.
But Brown, of the SBA, can't guarantee that borrowing opportunities will improve for companies such as Sergei's Dance Studio.
Too many local community banks face ongoing financial troubles, with cease-and-desist orders from the Federal Deposit Insurance Corp. preventing them from lending.
"Yes, we're dangling a carrot in front of lenders with the 90 percent guarantee and the waiver of fees, but if they can't do the loans, it's not going to make a difference," Brown said.
What's more likely to happen is a temporary and small jump in borrowing that ends suddenly after Dec. 31, when the new 7a regulations expire. That's what happened between June, when a previous stimulus package ended and borrowing restrictions returned, and September, when the current provisions kicked in. SBA loans fell off by about 50 percent over the summer, Brown noted.
"After December, I'm positive the same thing will happen," he said. "We'll be right back where we started."
Contact reporter Jennifer Robison at jrobison @reviewjournal.com or 702-380-4512.