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Small Business Lending Big Opportunities
By: Rebecca Mikkelsen

   

Early signs of an improving economy, including upticks in residential real estate and consumer confidence, have yet to translate to steady improvements for many small businesses in our community.  Financing continues to top the list of concerns for independent businesses, so we surveyed local lending sources about loan-related challenges and opportunities for small businesses, as well as top suggestions to improve chances of getting loans.  Here’s what they had to say:
 

U.S. Small Business Administration
Victor Parker
Los Angeles District Director, U.S. Small Business Administration

The pace of SBA-backed lending remains strong, providing capital to local small businesses.  More loans and more dollars were loaned in the second quarter of fiscal year 2013 than the same period a year ago, a year in which SBA recorded the second highest loan volume in the agency’s history.  Overall, lending continues at a solid pre-recession pace.

Specifically, SBA backed loans in Los Angeles, Ventura and Santa Barbara counties jumped 8.7 percent in dollar volume and 7 percent in the number of loans during the government’s midpoint of the fiscal year compared to the same time last year.

Between Oct. 1, 2012 and March 31, 2013 the Los Angeles District Office financed a portfolio of 1,129 businesses in the amount of $667.7 million compared to 1,055 businesses with $614.5 million the same time last year.

Overall, the pace of SBA loan-making with our lending partners is a healthy sign for the economy and the credit markets.  SBA loans are one of the foundations for ensuring the availability of financing to small businesses trying to establish themselves, grow and create new jobs for Americans.

A big part of what the SBA is able to accomplish in capital access, counseling and government contracting is through our Resource Partners such as: the Los Angeles Small Business Development Center Network’s ten centers, four Women’s Business Centers, three SCORE Chapters and the Procurement Technical Assistance Center, which advise thousands of small business owners a year with thousands of hours of one-on-one long term counseling. For information visit: www.sba.gov


Los Angeles Small Business Development Center Network
Jesse Torres
Regional Director
Los Angeles SBDC Lead Center


In 2012, the Los Angeles Small Business Development Center Network consulted more than 4,800 small businesses and assisted business owners in attaining more than $31 million in loans.  Comparatively, in 2009 at the worst of the Great Recession, loan attainment for our clients stood at a meager $6.5 million.  

Today, loan assistance remains one of our most requested services, and the average amount has increased for our clients, jumping from about $82,000 per loan in 2009 to about $230,000 in 2012.  The challenge for many small businesses is that while they may believe that their most critical area of pain is access to capital, in fact, their biggest limitation may well be a lack of understanding of the fundamentals of their own business.  Our SBDC advisors spend thousands of hours with business owners to help them examine, optimize and enhance the building blocks of their company so that they can confidently connect with lenders and provide a strong strategy for loan repayment.

With more major banks ramping up credit to small businesses and Experian/Moody’s issuing a positive first quarter report on small business credit quality, it is easy to be optimistic about small business growth.  However, sequestration has weakened our ability to service clients in our three-county area, with an automatic eight percent cut already administered to the LA SBDC program - a reduction of approximately $280,000.  In addition, the 2014 budget proposal by SBA reduces core SBDC services by about $10 million nationally, which would further reduce the LA SBDC Network’s ability to provide general counseling assistance – a tough blow for a small business community that is just gaining momentum. 

Small business continues to be challenged by the reluctance of banks to move beyond historical cash flow lending. Rather than underwriting that takes into consideration collateral and credit history, financial institutions, under the constant threat of examiner criticism, are lending based upon two years historical repayment ability.  If you have a business that has been profitable for the last two years, then credit is available and it is cheap.  Especially for owner operated real estate acquisition, financing is plentiful and cheap.  If you can find the right property at the right price, buy it.

File your 2012 tax returns  (forget extensions) and if you made money, show it!  Unless you have CPA prepared financials, your 2012 tax returns are the only proof that your sales are increasing and that you were profitable last year.  Limit the tax avoidance measures to loss carry forwards and depreciation:  those can be added back to show that you made money and can service debt.

VEDC works with the California Reinvestment Coalition to push for more small business lending by banks as well as more investments to and grants into alternative loan programs and entrepreneurship programs, respectively.  We want the banks to lend more, but by knowing their examiner-driven limitations, we can encourage the use of credit enhancement programs, such as the SBA and the State of California Loan Guarantee programs.

As to legislative issues, VEDC is pressing for the soonest collection of small business demographic information from the banks by the Consumer Financial Protection Bureau  (CFPB).  After decades of its prohibition, the collection and reporting of small business demographic information will finally tell us how much small business lending is being done to minority communities.

Fortunately, VEDC has not depended upon government for funding.  Financial institutions such as Well Fargo, Bank of America, Citibank, Goldman Sachs and UBS have provided the majority of funding to support the $40 million in lending made by VEDC in the past 3 years. Government continues to be challenged by bureaucracy- laden programs such as the State Small Business Credit Initiative and business unfriendly regulations such as in the New Market Tax Credit that remain inaccessible to small business CDFIs such as VEDC.  This could include pending legislation, upcoming elections or economic factors. For information visit: www.vedc.org


Community Bank 
David Malone
President


We are coming out of the worst economic downturn in more than 70 years. The recovery is gradual in many sectors, but it is real. Business banks serving small to midsize companies are eager to take part by doing what they do best, providing capital to help these companies seize opportunities. Yes, banks are lending. And yes, this is an excellent time to use lending to grow your business.

Interest rates are at historic lows. This is the primary driver for taking out a business loan today. The cost of financing capital equipment, real estate, or other means to boost your productivity and value has never been lower. With a fixed rate loan, you can lock in low monthly payments, allowing you to create financial forecasts well into the future. Rates have nowhere to go but up, perhaps not radically or rapidly, but it is the only possible direction given their current rock-bottom status.

When applying for a business loan, preparation is essential. A business bank wants to see ample documentation—a solid business plan, verifiable cash flow and sound projections. Ambitious goals are fine; in fact, they are the best rationale for accessing capital. But you must make a strong case to your banker. The good news is that your banker wants to show your company in the best light. A preliminary consultation at your business bank will provide guidelines on all necessary documentation.

The index of U.S. leading indicators is rising. Homebuilders’ confidence is on the upswing with projections for future sales at their highest level in six years. The auto industry is also looking at pre-recession marks for its sales. This is a time for optimism—not the giddy sort seen in the previous decade, but a well-reasoned, well-managed plan for growth. The right business loan will power that growth, funding changes in your company that can have positive effects for years to come. Talk to your business banker early and often. Treat the relationship as a partnership. Your local business bank is in business to help your business. For information visit: www.cbank.com


VEDC
Roberto Barragan
San Fernando Valley Corporation & Pacoima Development Federal Credit Union


What are the biggest lending-related challenges and opportunities for area small businesses?  Small business continues to be challenged by the reluctance of banks to move beyond historical cash flow lending. Rather than underwriting that takes into consideration collateral and credit history, financial institutions, under the constant threat of examiner criticism, are lending based upon two years historical repayment ability.  If you have a business that has been profitable for the last two years, then credit is available and it is cheap.  Especially for owner operated real estate acquisition, financing is plentiful and cheap.  If you can find the right property at the right price, buy it.

How do you advocate on behalf of small businesses in our community, both to banks to improve their lending practices and on legislative issues? VEDC works with the California Reinvestment Coalition to push for more small business lending by banks as well as more investments to and grants into alternative loan programs and entrepreneurship programs, respectively.  We want the banks to lend more, but by knowing their examiner driven limitations, we can encourage the use of credit enhancement programs, such as the SBA and the State of California Loan Guarantee programs. As to legislative issues, VEDC is pressing for the soonest collection of small business demographic information from the banks by the Consumer Financial Protection Bureau  (CFPB).  After decades of its prohibition, the collection and reporting of small business demographic information will finally tell us how much small business lending is being done to minority communities.

What are the things small businesses can do to improve their chances of obtaining loans through your Community Development Financial Institution?  File your 2012 tax returns  (forget extensions) and if you made money, show it!  Unless you have CPA prepared financials, your 2012 tax returns are the only proof that your sales are increasing and that you were profitable last year.  Limit the tax avoidance measures to loss carry forwards and depreciation:  those can be added back to show that you made money and can service debt.

What is the future for the many programs the VEDC offers to help small businesses obtain funding?  Fortunately, VEDC has not depended upon government for its funding.  Financial institutions such as Well Fargo, Bank of America, Citibank, Goldman Sachs and UBS have provided the majority of funding to support the $40 million in lending made by VEDC in the past 3 years. Government continues to be challenged by bureaucracy laden programs such as the State Small Business Credit Initiative and business unfriendly regulations such as in the New Market Tax Credit that remain inaccessible to small business CDFIs such as VEDC.  This could include pending legislation, upcoming elections or economic factors.


Wells Fargo Bank
Rita Mitchell
Vice President, Regional Sales Manager, Wells Fargo SBA Lending

It’s important for business owners to know what bankers are looking for a business to demonstrate before extending a loan. At Wells Fargo, there are several things we consider.  First, we want to make sure a business generates steady cash flow and has the resources to repay the loan. We also determine if a business’ current debt load is manageable and whether that business has a strong financial position to manage its debt payments and the ability to take on additional debt. In addition, it’s a good idea for a business to maintain a good payment history; this gives us confidence our customer has the ability repay the loan.

A long-term relationship with a bank can be important, as well. When Wells Fargo works closely with business owner over time, the business has an opportunity to show how it manages its finances, and our team becomes more familiar with the business owner, the business and its financial needs.

Responsible lenders only provide a loan when a business owner shows the ability to repay. When a small business is not ready for a loan the best thing Wells Fargo can do is provide guidance to business owners on how they can improve their financial condition to get a “yes” on a credit application at a later date. In some cases, our small business customers benefit from working with one of our community non-profit partners that specialize in helping small businesses develop the building blocks necessary to qualify for a loan, such as the VEDC (Valley Economic Development Center).

For our economy to fully recover, we need small businesses in L.A. and Southern California to grow, add jobs and prosper. That’s why working with small business owners is one of the most important things we do at Wells Fargo. For information visit: www.wellsfargo.com.

 

East West Bank   
Wai-Chun Li
First Vice President, Manager of SBA Lending Department


For small business operators, the biggest challenges are to obtain financing for the business, since they may often lack the operation history and/or collateral for the loans.  The SBA loan programs provide financial assistance to cater to the special needs of these operators.  There are programs where financial institutions, such as our Bank, provide loans with a guaranty from the federal Small Business Administration.  The guaranty by SBA eliminates certain credit risks for the Bank, hence allowing the latter to provide loans where credit may not be available elsewhere.  For instance, regular bank loan programs may not be offered for start up or acquisition of ownership interest in businesses.  Small business owners are hence encouraged to make inquiries on their financial needs, such as for start-up expenses, working capital, expansion, purchase of real estate and equipment, etc.  In most cases there may be a SBA program suitable for them.

It is crucial that the businesses should have well-kept financial information.  In most cases, we look at tax returns and updated financial statements for assessment of the loan applications.  There will also be other documentation requirements and information needed for the application, but our staff would help the customers walk through the process to alleviate their burden.  SBA loans give the most weight to the cash flow of the business.  To be eligible for the loans, the customer has to show that based on past performance or projection for the future, the business will be able to generate revenue to repay the loan by monthly installments.  Calculation of the cash flow by financial institutions for loan applications may be different from the general concept of profit. We would, for instance, add back the non-cash expense items such as depreciation to the cash flow.  Customers are welcome to inquire about their eligibility with us when in doubt. For information visit: www.eastwestbank.com








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