Small business lending picks up tentatively

Federally backed loans to small businesses in Southern California and across the nation are increasing as more banks participate in federal lending programs — at least for now.

The stepped-up lending through the Small Business Administration comes at a time when thousands of small businesses say they are choking from a lack of funds; many have gone out of business because they don’t have the money to purchase inventory or equipment.

“The market has changed,” said Gary Youmans, senior vice president of Pacific Alliance Bank in Rosemead, which recently stepped up its SBA lending. “They’ve made it more attractive for both sides — the lenders and the borrowers.”

The SBA supports bank lending in a variety of ways, including guaranteeing a portion of the loan amount and requiring lower down payments on some commercial real estate loans.

With cash from one of Youmans’ loans, businessman Steve Williamson has been able to buy and begin reconstruction of a Robeks juice franchise in Fullerton. Williamson came to Pacific Alliance Bank after his regular lender stopped making loans through the federal program.

More than 1,350 banks have returned to the main SBA lending program after dropping out, the SBA said this week. According to its data, financial institutions have made about 46,000 SBA loans so far this year, 30% more than at the same time last year. Locally, loans also are on track to outpace last year.

SBA loans make up a small portion of total lending to small companies, but the SBA numbers are viewed as a good indicator of the financial health of small business, a key part of the Southern California economy.

Still, the credit crunch for small businesses is far from over, and many bankers say they’re still not ready to trust the federal program. That’s bad news for small companies that have been hurt in the economic downturn, because many no longer have the pristine credit required for regular bank loans.

Nearly two weeks ago, longtime Southern California retailer Ken Crane’s Home Entertainment began liquidation sales, in part because of difficulty in obtaining credit to buy merchandise to sell. The television and electronics chain is expected to close within weeks.

And the owner of make-up supply house Cinema Secrets in Burbank, Maurice Stein, said his company was teetering because it couldn’t get loans to pay for the cosmetics, wigs and Halloween costumes that it sells.

“Not one lending institution has come through,” said Stein, who said he had applied for loans at more than seven banks. “It’s horrible.... I don’t know how much longer we’re going to last.”

Bank of America Corp., which was among those rejoining the ranks of lenders in one of the SBA’s key programs, estimated that it would make only 500 new loans in that program nationwide this year and may reduce its participation going forward.

The American Bankers Assn., the industry trade group in Washington, also greeted the federal loan numbers cautiously, saying that while many of its members are again testing the waters, the industry has not fully embraced federal small business lending programs.

“Some of those that are back in are not dramatically back in,” said James Ballentine, the group’s senior vice president. The thaw in small business lending is still just a slow melt, he said.

“It is a recovery that is going to take longer than anybody could have anticipated,” Ballentine said.

In Riverside County, Craig Puma had so little luck finding a conventional small business loan that he had to go to a high-interest, so-called hard-money lender in 2007 when he bought The Bank Mexican Restaurant and Bar in Temecula.

Over three years, he paid $47,000 in fees to the lender while putting purchases for new equipment on credit cards and running up $40,000 in debts.

“We were looking really good but we couldn’t get the loan,” said Puma, who applied at four banks before landing an SBA loan this spring from Pacific Alliance Bank.

Key to the increase in SBA lending has been smaller community banks that have decided to renew their participation in federal programs after dropping out during the worst of the economic crisis, said J. Mark Quinn, acting director of the SBA’s Western U.S. region.

Their participation is important because local banks are more likely to take the time to get to know local businesses before deciding whether to extend credit, Quinn said. The big banks take a more mechanized approach to lending and are typically less flexible with borrowers, he said.

It’s important to sign up new players, he said, because many of the community banks that used to give SBA loans have failed or merged with other institutions. “The financial services industry is a big food chain — everybody is either being eaten or eating somebody,” Quinn said. “It’s always important to be recruiting new folks into the field.”

As part of its effort to entice banks to participate in its programs, the Obama administration last year began to guarantee up to 90% of the loans, from up to 75%, in the SBA’s main program and reduced the fees charged to lenders and borrowers.

But despite the higher guarantee, Bank of America spokesman Jefferson George said, BofA lost more money than anticipated on loans made through the SBA’s main program.

Bank of America was a major player in SBA loans until the economic crunch when the bank mostly dropped out of the program. The bank’s withdrawal reduced the availability of credit to small businesses, according to SBA officials. The bank remains active in a smaller SBA program aimed at commercial real estate.

The bank’s other small business loans are made without federal support, as are the bulk of small business loans throughout the nation. But George said that those loans were also down earlier this year.

The bank made $3.4 billion in loans to small businesses during the first quarter of 2010, George said, down from $3.9 billion during the same period a year earlier. “We’re starting to see some improvement with the medium-sized business,” George said. “But it’s still tougher on the smaller end.”

sharon.bernstein@latimes.com