As small businesses search for money in a still-tight credit market, many are turning to a "relative" - Uncle Sam.
Fueled by a fresh stoking of taxpayer dollars and more generous terms, federally guaranteed Small Business Administration loans rebounded last quarter both nationally and in Arizona after a steep decline the previous year.
The number of SBA-backed loans in Arizona jumped 64 percent in the quarter ended Dec. 31 compared with the same period a year earlier, while the total loan value jumped 38 percent.
The renewed demand has been driven by a $730 million injection of federal stimulus funds, including $375 million to boost SBA lending guarantee amounts and cut loan fees. The stimulus funding also provided $255 million to set up a short-term, interest-free loan program for struggling but viable business and $30 million to expand microloan programs.
Perhaps never have SBA loans been more enticing. The SBA for its flagship 7(a) loans for working capital has increased the amount of loss it guarantees to repay participating lenders to up to 90 percent of their losses from loan defaults.
The agency also has waived fees on SBA loans, which can total 3 percent of a loan's value.
"SBA loans are very attractive now because there are no fees, which is like a 3 percent windfall to the borrower," said Stephen Hart, SBA senior area manager for Southern Arizona.
Hart says the agency urges business owners to shop for both conventional and SBA loans.
But he says SBA loans have helped take up the slack in loan demand from a conventional commercial credit market that has remained frigid despite regulators' attempts to boost lending.
"SBA offers a viable alternative to conventional commercial loans and are very attractive now, but they're not always the best alternative for small businesses," Hart said of the loans.
Sometimes, an SBA loan is the only realistic option.
Before the financial sector meltdown in late 2008, local salon owner and hairdresser Charles McCormack III said he was regularly visited by friendly bankers.
"I have excellent credit," he said. "Bankers would come in - some of them would bring little bags of candy, wanting to loan me money."
McCormack didn't need the money then.
But in late January 2009, McCormack's landlord told him that he was losing his lease and had to move his Crimson Hair, Skin & Nails Salon from its location on East Tanque Verde Road.
Even the candy-toting bankers wouldn't give McCormack the time of day, much less the $50,000 he sought to move and improve a new salon location, without putting his house up as collateral.
Worried that he would have to close up shop and lay off his five employees, McCormack finally contacted a banker at BBVA Compass Bank who offered him an alternative - an SBA 7(a) loan for $25,000. After applying in February, he got the funds in May.
"It was heaven-sent," said McCormack, who has since moved Crimson to 440 E. Grant Road.
In the past, small business owners like McCormack may have gotten a conventional commercial loan for emergencies like a forced move.
But SBA loans are propping up that part of the market as the conventional lending market has dried up.
"Especially right now, it's important to the community because banks aren't lending as much as they used to," said Dave Kaneda, regional sales manager for SBA lending for Wells Fargo Bank, the state's biggest SBA lender.
The SBA's various loan products vary in length and other terms based on specific purposes.
The agency's 7(a) loan program provides loans of up to $2 million typically over about five to 25 years, for working capital, including debt refinancing, capital equipment or real estate. Banks set their own rates, up to a maximum of 2.75 percent over the prime interest rate, which is at 3.25 percent.
Under the 7(a) program, the SBA also provides "express" loans of up to $500,000 with guarantees varying from 50 to 90 percent and higher interest caps.
The 7(a) loans typically carry adjustable rates, usually resetting after one year, Hart said.
Thanks to the stimulus funds, participating lenders now can get a 90 percent guarantee on any loan losses, up from 75 to 85 percent previously.
The SBA's second-biggest program, for so-called 504 loans, is specifically for the purchase of capital goods, such as trucks and equipment, or real estate such as existing buildings, construction or land purchases.
With 504 loans, which have terms of 10 to 20 years, lenders fund only 50 percent of the loan and are free to set interest rates based on a competitive market.
An entity called a certified development company or CDC funds 40 percent of each loan, issuing a type of bond called a debenture, which is guaranteed 100 percent by the SBA. The borrower typically puts down the remaining 10 percent of the loan amount.
The CDC portion of the loan is limited to $1.5 million for most projects but can reach $4 million for small manufacturers.
Arizona has three CDCs, including the Business Development Finance Corp., which has an office in Tucson.
The SBA also offers short-term "microloans," through intermediary lenders, of up to $35,000 for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery or equipment.
In addition to enhancing the SBA's ongoing loan programs, Congress last year approved $255 million for a temporary small-loan program to provide interest-free loans to help small firms weather the current economic doldrums.
The American Capital Recovery (ARC) loan program is designed to provide struggling, but viable, small businesses with interest-free loans of up to $35,000 to help pay off existing loans.
The SBA provides a 100 percent guarantee to the lender and requires no fees. Loan proceeds are provided over a six-month period and repayment of the principal is deferred for 12 months after disbursement of the proceeds. Repayment can extend up to five years.
But the program is for a limited time only - until the funds run out or Sept. 30, whichever comes first.
"It's really to capture those small businesses who need a breather," the SBA's Hart said.
Since the program was first funded last June through mid-January, 101 ARC loans totaling about $3.2 million have been made in Arizona.
One local ARC borrower was Marion Hook, owner of the Adobe Rose Inn.
Hook said she sought one of the new loans last year as tourism tanked and average occupancy at the six-room bed-and-breakfast at 940 N. Olsen Ave. fell from about 75 percent in 2008 to about 60 percent last year.
"You can't break even very long and stay in business," she said.
Hook said the $35,000 ARC loan she got in October through Tucson Federal Credit Union will help her accumulate a cash cushion to help sustain the business until tourism recovers.
"To me, it's like money from your grandma, that you pay back but it gets you through hard times," she said.
SBA lending isn't without its detractors.
Even before the injection of new stimulus funding, critics questioned why taxpayers should be on the hook for defaulted loans, and whether the government-backed loans unfairly competed with traditional small-business loan products.
But Hart said SBA guaranteed loans were created as a public-private partnership to fulfill needs unmet by the private market.
"We don't try to stifle competition in the private marketplace ... we're filling a void," he said.
A private analyst last year calculated the SBA loan default rate in 2008 at about 12 percent, compared with historic rates in the mid-single digits.
As of Oct. 31, 2009 the SBA calculated that about 9 percent of about 330,000 outstanding SBA loans were in default.
The default rate in Arizona at the same time was 8.14 percent on a statewide loan portfolio of about 7,500 loans.
But that doesn't mean the taxpayer is on the hook for the entire default amount, Hart said.
Because the SBA guarantees are based on lenders' losses after they have pursued borrowers and liquidated available collateral, the SBA was on the hook for about 4.3 percent of the total loan amount nationally and about 3 percent in Arizona.
Bob Coleman, editor of a newsletter on small business lending, said the SBA has historically funded all or most of its guarantee obligations through its fees.
The fee waiver funded by stimulus dollars means taxpayers will take a hit, but Coleman said that may be worth the cost.
"The dollars are minuscule compared with the benefit to taxpayers in (preserved) jobs and tax revenues," said Coleman, editor of Coleman Publishing in La Cañada, Calif.
Arizona lender rankings
Arizona lenders ranked by number of SBA loans in the 2009 federal fiscal year ending Sept. 30
Total value Rank Lender Loans (thousands)
1. Wells Fargo Bank 156 $64,485.6
2. Superior Financial Group 110 $ 1,165.0
3. JP Morgan Chase Bank 96 $ 11,517.3
4. BBVA Compass Bank 93 $ 28,359.7
5. U.S. Bank 34 $ 9,469.6
6. M & I Marshall & Ilsley Bank 23 $ 2,180.5
7. National Bank of AZ 20 $ 6,312.0
8. Alliance Bank of AZ 19 $ 6,095.9
9. BNC National Bank 17 $ 7,715.5
10. CoBiz Bank 17 $ 5,872.0
11. First Credit Union 16 $ 504.5
12. Sterling Savings Bank 13 $ 8,013.6
13. Vantage West Credit Union 11 $ 1,832.8
14. Copper Star Bank 10 $ 1,261.6
15. Midfirst Bank 10 $ 5,384.6
16. Excel National Bank 9 $ 11,380.2
17. First Citizens Bank 9 $ 9,697.6
18. Borrego Springs Bank 6 $ 691.0
19. Valley Capital Bank 6 $ 5,428.0
20. 1st Financial Bank 5 $ 1,470.0
21. Colonia Bank 5 $ 2,597.8
22. C.I.T. Small Bus Lending 4 $ 3,366.0
23. Desert Hills Bank 4 $ 558.6
24. Tucson Federal Credit Union 4 $ 136.2
Microlenders 39 $ 447.4
Certified Development Cos. 127 $ 76,383.0
Other local lenders 34 $ 11,835.7
Out-of-state-lenders 65 $ 25,070.7
Totals 962 $ 309,232.4
SOURCE: U.S. Small Business Administration
How to apply
To apply for an SBA loan, you need to visit your local participating bank or lending institution. When you apply for an SBA loan you are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guarantee.
Contact Assistant Business Editor David Wichner at email@example.com or 573-4181.