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Lending environment improving, but small businesses still struggle to secure loans

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San Diego small businesses are still struggling to secure loans, say some local professionals -- although first-quarter numbers from local banks suggest the credit environment is improving.

“It’s mixed,” said Wayne Levy, president of the local Entrepreneurs’ Organization chapter. “Banks are getting back to basics. … They’re generally wanting to get back into the lending business, but they’re not as risky as they used to be.”

Both the number of Small Business Administration loans and dollars jumped in the most recent first quarter, compared to the same quarter in 2009. In the first quarter of 2010, banks made 165 SBA loans to San Diego and Imperial County businesses, totaling almost $62 million, according to data from the San Diego SBA district office.

In the first quarter of 2009, banks made only 90 loans, totaling more than $32 million. In the fourth quarter of 2009, banks made 132 loans, totaling more than $70 million.

In aggregate, banks headquartered in San Diego also appeared to be expanding their small business balance sheets, according to data pulled from the Federal Deposit Insurance Corp. website.

As of the first quarter, the 23 banks together had more than 4,600 loans on their books secured by commercial property of $1 million or less, totaling $1.7 billion, compared to less than 4,500 loans totaling $1.6 billion at the end of June. (Quarterly data is not available before March 2010.)

They also held more than 15,000 commercial and industrial loans to U.S. addresses of $1 million or less totaling $1.1 billion, compared to more than 14,000 totaling $1.2 billion at the end of June.

Those who counsel and network with small business owners agree the lending spigot seems to be opening wider, but mostly for experienced entrepreneurs with a little more personal net worth and a stronger credit score.

“If anything, we’re more in a credit environment plateau, bumping along the bottom,” said Monty Dickinson, who advises small business professionals with SCORE San Diego. “You get in one of those loops: How do I get the experience if I can’t get the loan?”

He said he often tells startup businesses to go to friends and family or bootstrap first if they can’t get a loan.

For San Marcos-based Submarina, franchising has become a competition for cash buyers, said President and Chief Operating Officer Lynn Lowder. Before the downturn, the sandwich restaurant company had 20 buyers wanting to open up stores and approved for credit -- which was rescinded when the economy turned south, Lowder said.

Many banks are requiring that a potential franchisee have at least five years of food industry experience, although Submarina -- like other franchisors -- offers a ready-to-go operations structure, Lowder said.

“It gets to the point of being a little absurd,” he said.

The seemingly sluggish credit conditions are expected, said economist Christopher Thornberg: Banks that received funds from the federal government want the extra cushion against losses. Regulators are telling them to be risk averse. Credit-worthy borrowers are fewer and farther between. Also, the nation as a whole remains overleveraged.

“Anything compared to what was going on five years ago is going to feel worse,” the co-founder of Beacon Economics said. “We’re still at record high levels of debt in our economy.”

Still, other small business owners say credit has not been a problem. Both Space Micro President and CEO David Strobel and Zenzi CEO Sarah Hardwick said switching over to community banks and having a relationship with their bankers have helped them in maintaining their lines of credit.

However, both also said they’re not using their line of credit as much or at all -- bankers say unutilized lines of credit are at an all-time high -- and that it mainly provides an additional cushion.

Securing credit lines and borrowing money for investments should not be an issue; it’s borrowing to fund ongoing business expenses that should be more difficult as banks avoid riskier businesses, Thornberg said.

Thornberg doesn’t expect money to flood out of bank coffers, but notes that even a small increase in lending is a powerful force.

“Every dollar loaned adds $9 to the economy because of the money multiplier effect,” Thornberg said. “It doesn’t have to be a lot to have a fairly large effect.”

Most community bankers agree demand remains soft; any slight uptick in demand is usually credited to there being fewer players in the market or the bank being more aggressive about seeking out clients. Most bankers also agree that businesses’ credit quality remains poor.

The credit environment may change once again as stimulus dollars allocated to reduce fees and increase guarantees for SBA programs have run out. Congress has not yet agreed as to whether to extend the loan incentives again.

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