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Money Flows To Small Business
Small-business lending continues to grow and SBA loans reach all-time highs in Connecticut. Now, several area banks are redoubling their efforts to find lending opportunities to more small and minority-owned businesses
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Business New Haven
11/3/1997
By: Albert S. Coppola
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No question about it: Loans written with the assistance of the U.S. Small Business Administration (SBA) are up from two years ago. In 1996, the amount of money lent by the top three SBA lenders was double that of the year before. And officials at those banks say 1997 is right on pace with last year.
There is a veritable smorgasbord of SBA programs out there to help small businesses gain access to financing that they would otherwise be denied. By extending a federal guarantee to up to $750,000 or 80 percent of a loan, the so-called 7(a) loan is only the most prevalent SBA-backed financing. New programs - such as the long-term 504 program, where borrowers can reduce their down payments by receiving SBA guarantees of up to 40 percent, or the streamlined LowDoc program for smaller borrowings - offer business owners a wider range of options than previously available.
Still, working with the SBA doesn't make getting a loan any less complicated. “You've definitely got to jump through a few extra hoops,” said Dan Boyce, president of Performance Snowboarding in Fairfield, who received a $300,000 loan for working capital two years ago.
Boyce says he applied for an SBA loan because it represented a “better deal” than the bank would have given him without the federal guarantee.
Richard Bradshaw, an executive vice president at First National Bank of New England, where Joyce got his loan, explained that SBA is often used as “a credit enhancement, not a credit shield” that allows borrowers to get a longer-term loan with lower monthly payments and less money up front.
It does take longer to gain approval, but Chris Earle, a vice president in charge of SBA loans at First Union Bank of Connecticut, says that in the case of long delays, it's not necessarily the SBA to blame. “More often, the problem is with the bank,” he says.
The SBA recognizes three types of lenders, Earle points out: “Preferred” lenders have one day turn-around approval; “Certified” lenders have three day turn-around approval; other banks have no special recognition. “Ask if your bank is preferred,” he suggests.
Still, certain programs, such as the 504 loan, require as many as three levels of approval. In light of the upturn in the economy - and the extra hassles that come along with SBA loans - how necessary is an SBA guarantee for getting a small-business loan these days?
In the case of one entrepreneur, it was indispensable. “I don't think I could have got my loan without it,” said Tim Claypoole, owner of Yourz, a new T-shirt boutique located on Whitney Avenue in New Haven. The shop sells silkscreened and embroidered clothing, bags, mugs and greeting cards, most of which involve a stick figure design that started out on Claypoole's sketch pad 13 years ago.
The store opened in May, but not before Claypoole negotiated one of the new SBA-backed LowDoc loans from People's Bank. The program, which guarantees up to 80 percent of a loan of up to $100,000, features a one-page SBA application and was designed to streamline the process of getting loans to the smallest of small businesses. How well did the program live up to its promises?
“It was really simple,” Claypoole recalls. “I filled out the paperwork with the bank, and then filled out the paperwork for the SBA. They didn't have any questions, and I didn't hear back from them until about eight weeks later when I got the loan.”
“From when I first sat down, it only took a couple of months,” says the 29-year-old entrepreneur, whose father co-signed the loan. Less than $50,000 (Claypoole declines to specify the exact amount), the loan went toward “start-up costs” such as inventory and remodeling the storefront, he says.
“I think banks are so shell-shocked from the '80s that they're reticent about giving money to small businesses,” Claypoole says. Especially to businesses in my situation, where they don't have a” lot of capital. My bank was encouraging, but SBA really helped solidify the deal,” he said.
Not all borrowers wind up as happy with their loans as Tim Claypoole, however. For Laura J. Reid, the decision to go through the SBA turned into a bureaucratic nightmare from which she has yet to awaken.
The co-owner of Fish Mart, a wholesale livestock business that supplies tropical fish, small animals and reptiles to pet stores, Reid and her husband bought the 23-year-old business outright from their other partners in 1980 for $1 and $200,000 in debt. Since then they have grown it to $6 million in annual revenues.
In 1986, Reid says they decided to buy the business' current facility on Richard Street in West Haven, so they went to what was then Connecticut Savings Bank (now First Union Bank of Connecticut) and negotiated a $272,000 loan under what was then the SBA's 503 program. The SBA 503 has since become the SBA 504, after some important changes were made to address the sorts of problems that borrowers like Reid faced in the past.
“We only had ten percent for a down payment at the time, and that's when the bank suggested going with the SBA,” she says. As the 504 loan requires now, the 503 program required the borrower to front only ten percent of the loan, while the bank supplies 50 percent and the remaining 40 percent is put up by an SBA-guaranteed Community Development Corp. (CDC), which finances its portion through the sale of bonds.
Sounds perfect, right? “It was a bureaucratic nightmare,” says Reid, who complained that it took a year and a half to close on the loan. By that time, she said, Fish Mart was in a position to pay a full 20 percent down payment, which meant that they could have qualified for a regular bank loan and avoided the SBA hassles altogether.
“The closing document was three inches thick,” she jokes now. “My husband and I each had to sign our names 75 times at the closing.”
What's no laughing matter, she said, are the pre-payment penalties that prevented her from getting the 20-year loan off her books. She's long since cashed out the portion that her bank put up, but since the SBA's portion of her 503 loan is financed by bonds, she would have to implement a complex financing mechanism - most likely by buying bonds herself - to meet the payments of those SBA bonds when they come due. Markets have changed and interest rates have dropped since 1987, and the cost for Fish Mart to do this is prohibitive, she says.
“It's a monkey on my back that I don't want and don't need,” Reid says. “But it's too onerous to pay off.”
The SBA has since addressed this problem, and the new 504 loans now have fixed pre-payment penalties that decrease over time. “It's no longer a market crapshoot,” explains Mark Cousineau, deputy director of the New Haven Community Investment Corp., the CDC that financed Fish Mart's loan. The new 504s charge a year's interest in the first year for early payments, and then that penalty decreases by percentages until there's no penalty at half term, according to Cousineau.
“[Prepayment] has been addressed going forward, but not for people who took advantage of the 503,” he explains. “Trying to explain that to a [ticked]-off borrower is not fun.”
Reid is quick to acknowledge: “My experience with the SBA is from 1988. We're talking a good long time ago.” Still, she has been turned off by the process.
“Up until a couple of years ago, banks were very tight-fisted.” she says. Now that the economy has picked up, they're more responsive to small business' needs. I don't think there's a big demand for SBA loans.”
Don't tell that to Joseph Pippa. Pippa owns Vari Fasteners Inc., a family business with $1.5 million in sales last year. The 20-year-old defense contractor assembles and distributes parts for military hardware to companies like Sikorsky, Lockheed Martin and General Dynamics.
Having outgrown the company's leased 4,000-square-foot facility in Milford, Pippa says his company plans to purchase a 6,000-square-foot building around the corner.
With new contracts coming in, Pippa explains, “We just don't have room for the inventory we have to have on hand” as part of those agreements. Also, “We want something that looks nice when we fly in our clients,” he explains. “We want to dress it up nice.”
Vari Fasteners applied for a $330,000 SBA 504 loan about five weeks ago, he says, and he expects to hear if he has been approved within a month or so. “It looks very favorable. At the moment, we're waiting on SBA approval.”
Pippa says his application has been approved by his bank, the New Haven Savings Bank, and that now his application awaits approval by the board of the CDC he's working with. Once the CDC approves the loan, then the application gets shipped off to Hartford for SBA approval.
Cousineau, whose CDC is also backing Vari Fastener's loan, should it be approved, notes that another important change in the 504 program is an “expedited closing process,” in which the SBA now reviews only a handful of key closing documents and shifts most of the closing responsibility and liability to the CDCs. Still, Cousineau says, waiting for SBA approval can add two to six weeks to the process.
Even if his loan doesn't come through as quickly as he hopes, Pippa says he's in a position where there's no need to rush. He says his company is buying the new building from his current landlord, and there's “no pressure” to close the deal now.
Why an SBA loan? “To prevent cash-flow problems,” explains Pippa. “We were talking with our banker, and we were already approved for the loan, but the bank would have needed a 25-percent down payment. If we go through SBA, we only need ten percent.” BNH
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