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Expert Insights: Small business lending

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The Daily Transcript asked three leaders in the local banking industry about current trends for financing small businesses.

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Paul Rodeno

Paul Rodeno

President and CEO, Security Business Bank

At this stage in the economic recovery, what is the state of small business lending?

We are bullish on small business lending. Despite the sluggish economy, many of our clients are seeking ways to expand by investing in infrastructure, extending their product lines and identifying new business opportunities. On the supply side, the U.S. Treasury recently rolled out a Small Business Lending Fund to stimulate lending to small businesses. The program provides capital to qualified banks in an effort to increase lending activity across the country.

What is the current demand for loans from local small businesses, and how do you see that demand progressing in the immediate future?

From our perspective, demand for loans is strong. Security Business Bank funded $11 million in new loans this June – our largest monthly loan outlay in more than 12 months. Demand is expected to remain steady as business owners take advantage of lower equipment prices, available human resources and rising consumer demand to ready their companies for growth.

What are the primary factors preventing substantial increases in small business lending?

A lack of business experience, substantial prior losses and other traditional obstacles to lending continue to come into play. Our small business lending team has become expert at vetting entrepreneurial companies, looking at organizations in a comprehensive way and finding hybrid loan products that work for individual businesses. One example is Wang’s North Park, a Pan-Asian restaurant slated to open in the historic but long shuttered JCPenney building later this year. To assemble the funding the owners needed, we combined an SBA 7(a) loan with a second loan product sponsored by the City of San Diego and geared toward redevelopment. In today’s economy, we’ve found that this type of creative approach to lending is one of the most effective ways to make deals happen.

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Dan Yates

Dan Yates

President and CEO, Regents Bank

At this stage in the economic recovery, what is the state of small business lending?

A significant percentage of small to medium sized businesses (i.e. those with revenues between $3 million and $75 million) are still experiencing the negative impacts of the current economic climate. Typically we find that a great many businesses have experienced one or more recent quarters of operating losses, flat or declining revenues, and are struggling to generate a profit. Particularly hard hit are the construction trades and many service industries.

What is the current demand for loans from local small businesses, and how do you see that demand progressing in the immediate future?

With soft or declining revenues still the status quo and little prospects of that changing in the near- to mid-term outlook, the demand to borrow money for working capital purposes remains very weak, the demand to invest in plant and equipment remains weak, and there is limited demand amongst business owners to invest in owner occupied commercial real estate for their business use. I do not see the demand for loans increasing in the near future.

What are the primary factors preventing substantial increases in small business lending?

In previous recessions real estate investments traditionally have served as a catalyst to generate growth in the overall economy and pull us out of a recession. Banks are still dealing with a heavy concentration of problem commercial real estate loans and have a limited appetite and ability to increase their commercial real estate lending activities. Hence real estate loans are hard to come by, and without easy access to real estate loans many development projects are stalled in the planning stages. As a result, this negatively impacts the construction trades, which are a major economic engine in Southern California.

Consumers have been and continue to be focused on deleveraging. Debt reduction and living within one’s means is a major focus today. This is in stark contrast to a prolonged cycle where consumers found it fashionable to tap home equity lines of credit to pull cash equity out of their homes and spent the equity on vacation, consumer products, home improvements, education, etc.

We spent a decade or more as a country living well beyond our means -- if you define means as discretionary income. We were spending paper equity which eventually evaporated and along with it consumer spending. As long as home prices were on the rise and home equity was increasing, and more importantly as long as there was easy access to cheap home equity credit lines, John Q Public was willing and delighted to spend their home equity on all sorts of products and services that created strong economic activity spread out over a wide range of companies and industries that benefited during the cycle. Now that we are deleveraging as a nation, consumer spending is down, spending is now once again tied to discretionary income rather than unrealistic equity growth and cheap debt.

Computer and electronic products and software is one of the notable exceptions with respect to growth, as many companies in this sector are experiencing moderate to strong revenue growth.

U.S. companies selling new innovations globally in industries such as nanotech and biotech will be critical in our nation’s quest to re-energize economic growth again.

A government policy to provide investment tax credits would be well received by the business sector. We need to find a way to tackle entitlement programs in order to reduce taxes and provide additional funds/discretionary income for consumers to spend on products and services. Easily said, but politically near impossible to implement, so I don’t see any quick fix to get our economy jump-started.

I believe we are looking at a prolonged period of time where slow to moderate growth will be the norm, many weaker businesses will fail and banks will not be an exception as the industry continues to consolidate. Individual banks will see loan growth primarily by stealing market share from other institutions, but overall I do not see strong aggregate increase in loan volume for the nation overall, anytime soon.

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Alan Lane

Alan Lane

President, Silvergate Bank

At this stage in the economic recovery, what is the state of small business lending?

The availability of small business lending currently exceeds the demand for loans from local small businesses. There are certainly many banks still struggling with problem loans, but there are also a few local banks such as Silvergate Bank with strong capital ratios and money to lend to small businesses.

In addition, the federal government continues to provide economic incentives for banks to lend to small businesses, through programs such as the long standing Small Business Administration (SBA) loan guarantee programs, as well as the more recent U.S. Treasury Small Business Lending Fund (SBLF). Some local banks will use proceeds from the SBLF program to repay the TARP funds they received from the government. While Silvergate Bank was approved for TARP back in 2009, we declined the TARP investment because we didn’t need it; however, we have just been approved by the U.S. Treasury to receive $12.4 million from the SBLF, and we intend to use this additional capital to lend to small businesses in San Diego County and throughout Southern California.

What is the current demand for loans from local small businesses, and how do you see that demand progressing in the immediate future?

Overall demand for loans from local small businesses is still weak – in fact, as mentioned above, I believe the current supply from local, healthy banks such as Silvergate Bank exceeds the local demand. However, there are some bright spots, such as the technology sector here in San Diego. We’ve also seen an increase in activity in the hospitality sector. Retail and construction continue to be weak overall, although we have recently begun to see some attractive construction lending opportunities, both residential and commercial, here in San Diego. I believe the immediate future will look very similar to the current climate.

What are the primary factors preventing substantial increases in small business lending?

Uncertainty. Demand for loans from local small businesses will only increase as the perceived uncertainty abates surrounding the U.S. and global economies. The daily news headlines regarding the U.S. debt ceiling, unemployment, residential mortgage foreclosures, Greece’s debt crisis, etc., fuel the ongoing feeling of unease about the future. Some of these issues (the debt ceiling and the debt crisis in Greece) will likely see solutions (at least temporarily) in the very near future.

Others, such as the large inventory of foreclosed residential real estate and high unemployment, appear likely to remain a drag on the U.S. economy for years to come. On a relative basis, San Diego appears to be doing better than many other areas across the country -- just one more reason to live and work in America’s Finest City.


-Compiled by Andrew Keatts

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