SBA Lending – Extending a Hand to Small Business
By Jennifer Jope
Imagine lending hundreds of thousands of dollars to a business that has no collateral or solid financial history. Most banks wouldn’t think twice about denying that loan application, but with the help of the United States Small Business Administration, more New Jersey banks are reaching out to entrepreneurs and providing financing for businesses like restaurants, gas stations and day-care centers.
For Hopewell Valley Community Bank, the SBA program has allowed the institution to make loans to retail clothing stores, tanning salons, a kennel and a bed and breakfast. The average loan size is between $500,000 and $750,000.
“It enables us to lend money where credit may not be obtainable,” said Andre J. Caldini, vice president at Hopewell.
This sentiment is echoed throughout the state as many of the SBA lenders admit that a business with little to show wouldn’t get a conventional loan from them.
“We’re believing in their projections and their dreams [when lending through the SBA],” explained Andrew Glatz, vice president and SBA lending manager at Sun National Bank in Vineland. “The SBA program enables a bank to lend to companies … that haven’t reached their peak yet.”
GETTING THEM TO THE NEXT LEVEL
The SBA was created in 1953 as an independent arm of the federal government to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.” The New Jersey district office delivers SBA programs and services to 21 counties in the state. Other than financing through lenders, the SBA also provides counseling on issues such as starting and managing a business.
Last year, the New Jersey SBA office approved 3,687 loans for $706 million.
Caldini’s bank has partnered with the SBA since the bank’s inception in 1999. For a bank that “always tries to find a way to make a deal,” the SBA guaranty has helped Hopewell establish itself in its service area. Last year, the bank did 22 SBA loans and 12 in 2004. Although the SBA loan portion is a small part of the bank’s overall commercial loan portfolio, Caldini said the SBA loans are simply another way to help make a business a success. Some of the loans have been for businesses that were renting space and decided to buy property. Last year, the bank financed between six and eight startup businesses and the rest were existing small businesses.
“We were able to help them get to the next level,” Caldini explained.
DEDICATED TO SUCCESS
New Millennium Bank in New Brunswick has been an active SBA participant since 1999 as well. Robert Bechtel, senior vice president and SBA department manager, said the last 18 months have been eventful for the bank as it became a Preferred Lender and increased its SBA loan volume. The bank also employs a full-time staff that works strictly with SBA lending.
“We are dedicated to the success of the SBA program,” he said.
In 2004, the bank closed $5.8 million in SBA loans. In 2005, they closed $12.5 million.
“We’ve serviced everything from A to Z,” Bechtel said. “It provides us the ability to make a loan and the ability to serve the community.”
STRENGTHENING THE PORTFOLIO
Newark-based bcpbank became an SBA lender in July 2004 and began actively providing financing in October of that year. John S. Kosko of the small-business lending department said the bank realized it was important to reach out to smaller businesses. Initially, bcpbank focused more on larger real estate loans, but the institution had the foresight to know that SBA lending could strengthen their portfolio.
“[Partnering with the SBA] was in anticipation of the demand,” Kosko said.
Although the bank has only been using the SBA program for about a year, Kosko said it is devoted to reaching out to both existing and new customers and has implemented a strategy.
“We are using branch managers in an expanded role,” said Kosko.
As bcpbank focuses more on small business, it has also created a product line which includes payroll services, investment banking and checking accounts.
THAT PERSONAL TOUCH
For a local community institution like Woodbury-based The Bank, the SBA provides a level of comfort.
“The SBA helps a bank partner with a new business or basically a business looking to grow that may not meet all the bank’s conventional underwriting guidelines,” said Gary Graves, vice president. “We target small-business customers that want that personal touch.”
Between October 2005 and January 2006, The Bank has closed 15 loans totaling $2.5 million. One of the small-business loans was made to a full-service salon open for 15 years. When the owners were looking to grow into a second location, The Bank provided $450,000 in SBA financing. The challenge with the service industry is the lack of collateral.
“You’re lending on experience and clientele,” Graves explained.
The Bank financed a tanning salon in the Salem County area which has seen more volume than projected.
“They are doing very well for being a niche area,” he said.
A CHANGING LANDSCAPE
In recent years, the banking landscape has changed as more banks merge together. James A. Kocsi, district director of the SBA-New Jersey District, said acquisitions can sometimes be a challenge. While there are many banks that acquire another institution, such as the recent merger between TD Banknorth N.A. and Hudson United Bank in Mahwah, and embrace the existing SBA program, Kocsi said sometimes it’s not that easy. When an acquiring bank is a non-SBA lender, sometimes Kocsi’s office must market the program to the larger institution.
For TD Banknorth, it was easy to accept Hudson United’s work as an SBA lender. According to Hudson United Vice President Barbara Speid, Hudson had received several accolades from the SBA, such as a Silver Award in New Jersey, a Bronze in New York and the “Most Improved Lender” in New Jersey. Speid has a theory on why the bank received these awards.
“If you structure [the loan] at the onset, the loan will close,” said Speid, adding if the bank has to go back and forth to the customer, the loan won’t make it.
Hudson has been active in providing financing to startups and businesses owned by women or minorities.
“We use SBA for startup businesses that can’t finance out-of-pocket,” Speid said.
The bank provided $200,000 to enable a company that cleans and sells firefighter uniforms to open. Because of growth, the company is now looking for more financing.
TD Banknorth is indeed committed to extending SBA lending throughout Hudson’s existing branch network, according to Anne Cerami, manager of agency guaranty programs for TD Banknorth.
She mentioned TD Banknorth’s use of the SBA Community Express program in particular, which focuses on underserved markets: minority-, veteran- and women-owned businesses that are primarily start-ups and would ordinarily be hard-pressed to receive funding. And SBA capital programs give small businesses the working capital to ramp up production when necessary, particularly to fulfill government contracts, which have greatly increased due to the war on terrorism and recent natural disasters, Cerami said.
“Commercial lending is comprised of all different types of loans, from the very simple to the very complex. The beauty of SBA is that it has different programs for all complexities out there,” she said.
IT’S ABOUT COMMITMENT
Other banks have received awards and reached milestones with the SBA. Bank of America ranks No. 1 in the state for SBA lending.
“We understand that small business is the engine of our economy. It’s the fastest-growing segment in the national economy, and being able to develop the right solutions for clients is key. SBA definitely plays a very integral part in that strategy,” said Jim Vaughn, government lending program executive at Bank of America.
Vaughn praised the SBA, in particular the 504 real estate program.
“It allows us the opportunity to tailor solutions to our clients’ needs so they can conserve liquidity and don’t have to pay as much for a downpayment, compared to traditional loans,” he said. “Bank of America is the only bank that allows 20-year-fixed loans as standard … It allows us the opportunity to separate ourselves from other banks.”
Sun National Bank broke into the top 10 SBA lenders in New Jersey last year. The bank was rated No. 9 with 112 loans for $18.4 million. In November 2005, the bank was awarded with the SBA’s Gold Award for approving more than 100 loans. In 2004, the bank received the “Breakthrough Lender” award. Glatz said that, because the bank’s leaders were committed to small-business lending, the bank was able to make these strides.
“It was the commitment from the bank,” said Glatz.
One of Sun’s success stories is Phacil, which provides information technology, systems integration, engineering and logistics support services. The company’s customer base consists of the federal government, both military and civilian agencies, as well as the commercial sector. Sascha Mornell, president and COO of Phacil, said his relationship with the bank began in 2004. As his company was growing extensively, Mornell sought loans through larger institutions, but with no luck.
“They didn’t understand the business model,” Mornell said.
Sun provided Mornell with a SBAExpress line of credit for $50,000 for working capital. That line of credit has since increased to $350,000.
Because Phacil’s employees work based on a contract, there is sometimes lag time between when the work occurs and payment. The working capital allows Phacil to pay salaries and other expenses until it is paid by its client.
“Sun has been there for us,” Mornell said, adding the SBA program allows Sun to reach entrepreneurs at an early stage.
“We get in early before they’re peaking,” he said.
BUILDING CUSTOMER LOYALTY
Michael Novak, vice president and senior lender at Somerset Valley Bank, says customers tend to be loyal once you provide them with unconventional financing.
“They always remember the bank that gave them a chance,” Novak said.
For Somerset, one success story is the medical advertising business that received a $250,000 loan to start. Last year, the company’s revenue was between $50 billion and $80 billion.
The SBA loans represent approximately 10 percent of Somerset’s portfolio and continue to be part of the bank’s marketing strategy.
“We continue to target small- to medium-sized businesses, which is the bread and butter of SBA,” said Novak.
THE BIGGER PICTURE
Valley National Bank in Wayne was ranked No. 5 in New Jersey last year with 198 loans for $38.9 million. It also received the Gold Award in 2005. Bruce A. Rossi, first vice president of small business administration at Valley, said it has always ranked in the top 10 of SBA lenders because the “bank is committed to [SBA].”
The SBA financing has been a catalyst for many businesses to succeed. Valley, which finances many startup companies, provided a loan to a child-care center that grew so large that it had to change locations. A restaurant that received an SBA loan through Valley became so successful it needed to put an addition on the building. In these cases, the small-business owners have returned to the bank for additional financing.
“It’s nice to see this kind of thing happening,” said Rossi. “The greatest compliment is when they [businesses] move to the conventional side of the bank to get financing.”
While the majority of banks acknowledge that the SBA loans bring in new business to the institution, Rossi said it is important to look at the bigger picture. When a small business grows, it hires more employees and begins ordering supplies and materials from other companies throughout the country.
“You can’t look at it in just a microcosm,” said Rossi. “It’s good for the entire economy. It’s all interrelated.”
A CONSERVATIVE APPROACH
Because the SBA programs give banks the comfort level to lend to a riskier business, many are more willing to provide financing. However, one bank – Skylands Community Bank in Hackettstown – describes itself as “conservative.” Michael Van Houten, assistant vice president, said the bank has no delinquencies in its SBA portfolio. He said the institution is careful to whom they provide financing.
“We don’t just lend to anyone because of the SBA guaranty,” Van Houten said.
Skylands has financed gyms, trucking companies and landscapers with the average loan around $150,000. As the bank gets more comfortable with its SBA focus, the proof is there. The bank increased its application volume by 40 percent over the last two years.
For small banks, the SBA program can actually be helpful to the loan portfolio. Michael Downes, executive vice president and chief lending officer at Clinton-based Unity Bank, said when a small bank is trying to grow, the SBA affords it some flexibility because the institution can sell off the guaranteed portion and make a good spread by making between eight and 10 points.
“When you’re a small bank, it gives you better liquidity,” Downes said.
Unlike most banks who said the SBA programs are a small percentage of their loan portfolio, Downes said SBA loans represent 50 percent of the bank’s commercial lending. Unity enjoyed a record year in 2005 with 186 loans worth $67 million and ranked in the top five in New Jersey for dollar volume.
PERSONAL ATTENTION AND QUICK DECISIONS
Another small community bank – 1st Constitution Bank – has seen success stories through their SBA lending program. Steve Seong, vice president and small business administration manager, said the bank was able to help a struggling drycleaner. With one plant and two drop-off locations in New York, the drycleaner was forced to move because of increasing rents and landlords who feared environmental damage. After finding a building and plant in Hackensack, the drycleaner was able to secure an $850,000 loan with 1st Constitution. Seong said that, because the bank is small, the businesses get personal attention.
“We can make quick decisions,” said Seong. “I go out and visit all the businesses. We are very progressive.”
A SEASONAL APPROACH
Susquehanna Patriot Bank has provided loans to seasonal businesses and seen the companies grow in New Jersey. Lynn Ozer, senior vice president, said a costume manufacturer needed financing for labor and materials. The working capital allowed the company time to sell the products and collect payment.
“They had a good established track record,” but no collateral, said Ozer.
Last year, the bank did 42 SBA loans in New Jersey. Other examples include a restaurant that needed a bigger facility. Susquehanna Patriot provided a $2 million loan to build a new building.
The SBA program has given some banks a chance to go beyond their typical service area. Vince Spero, vice president of commercial lending at Lakeland Bancorp in Oak Ridge, said the bank has entered new markets and is completing SBA deals in areas usually untouched by Lakeland, such as western New Jersey.
Lakeland also uses the SBA programs as a way to strengthen the relationship between them and their customers.
“It’s a product that complements our overall relationship,” said Robert Vandendergh, chief loan officer.
Spero estimated that the bank does approximately 20 SBA loans each year ranging between $100,000 and $400,000.
A PROFITABLE VENTURE FOR ALL
PNC Bank, which continues to be the second-largest SBA lender in New Jersey by dollar volume and number of loans, describes its SBA loans as “not insignificant” to its overall commercial lending portfolio. According to Jordan Peterson, senior credit product manager at PNC, the overall business banking department originates $2 billion in loans and the SBA component is about $400 million.
Like other banks, PNC has found that the SBA loans are profitable in the secondary market. Jeff Schmidt, executive vice president and manager of business banking at PNC, said selling off these loans is a great way to bring in fee income. One way that PNC tries to accommodate as many customers as possible is running a loan at least twice. Peterson said loan applications that don’t pass the bank’s conventional underwriting guidelines will subsequently be screened through the SBA programs.
“We are giving customers two chances,” said Peterson, adding there are additional chances with other products offered by the bank, as well.
PNC is currently working with Health & Wellness Partners to provide financing to the 10-person company. Jane Hegarty, principal, said the loan is intended to provide a cushion for the company if it enters lean times. The company creates and delivers medical education and marketing projects and programs for healthcare professionals, their patients and the general public. Since working with PNC, Hegarty’s firm has moved all its accounts to the bank and holds relatively significant balances.
SBA – ALIVE AND WELL
The SBA program has proven a success for both banks and small businesses. Kocsi, of the SBA, said the government program is strong and active.
“The program is alive and well,” Kocsi said. “There is plenty of funding.”
Jennifer Jope is a freelance writer based in Boston.