The Sacramento region’s small businesses are taking out loans and lines of credit to expand and buy equipment at levels not seen since before the Great Recession, and that’s good news for a region that depends on companies with fewer than 50 employees for the bulk of its private-sector jobs.
The U.S. Small Business Administration backed $384.2 million worth of small-business loans in Sacramento during its fiscal year ending Sept. 30, 2015 – the latest data from a complete year – up from a post-recession low of $166.1 million in 2009. In 2007, the year the nation started to dip into a recessionary period, the SBA’s Sacramento district supported $407.5 million in loans.
Joe McClure, the director of the SBA’s local office, said the region is on track to match last year’s stats, with $341.8 million in guaranteed loans issued as of July 31. He described the growth in regional small-business lending as phenomenal, noting that there’s been an increase in not only SBA-backed loans but also in traditional bank loans. Revenue has begun to grow again for businesses, he said, as more people find employment and consumer spending increases.
“It took businesses a while to get their balance sheets healthy enough that they could actually qualify for a traditional SBA loan or even a bank loan,” McClure said. “Their cash reserves were depleted ... and they waited until they absolutely, positively had to hire somebody or had to borrow money.”
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Small-business owners, McClure said, didn’t want to be put in the position of terminating employees if the economic recovery didn’t continue.
“Small-business people, for the most part, know their employees intimately, their family and friends, and they’ve become very good friends over time,” McClure said. “What they were saying is, ‘I’m not hiring anybody until I have to put a desk in a hallway because I don’t want to have to turn around a year from now and let that person go.’”
When it comes to SBA-backed loans in the Sacramento region, Wells Fargo leads the way with $44.2 million financed so far this year. The tiny Golden Pacific Bank showed outsized muscle with a portfolio of $17.3 million, followed by Seacoast Commerce Bank at $16.6 million and Live Oak Banking Co. at $16.1 million.
Small business are responsible for the majority of job growth in the national economy, McClure said, but historically their owners have had a very difficult time accessing capital at reasonable rates from risk-averse lenders. The SBA loan guaranty programs back the loan up to 90 percent to encourage lenders to take a chance.
Entrepreneur Cinde Dolphin sought loans from three banks and a credit union to get her business off the ground in 2014, but she got no takers. Her startup, KILI Medical Drain Carrier, manufactures mesh pouches that patients can put around their waists after surgery to carry fluids that drain from wounds.
“I am a four-time cancer survivor,” said Dolphin, the subject of a Bee article by my colleague Claudia Buck last year after several local hospitals began buying the pouches. “I’ve had about nine surgeries that required these medical drains and realized that the medical community had not come up with a way to manage the drain. So I developed this system.”
Dolphin had to go the extra mile to get financing, working with counselors from the Service Corps of Retired Executives and from the Sacramento Metro Chamber’s Small Business Development Center to tell her business story. Her startup ended up getting a loan from CDC Small Business Finance, a nonprofit lender that partners with the SBA to provide loans directly to small businesses.
McClure said he’s heard people say that banks are loosening up their grasp on capital, but he doesn’t see that as the reason behind the growth in small-business lending. Startup ventures such as Dolphin’s KILI will always have more difficulty getting loans from for-profit lenders because they don’t have a proven track record, he said.
“Banks are actually seeing more applicants that they can lend to,” McClure said. “Four or five years ago, they couldn’t lend to them because they were so beaten up or under water. ... Prudently, they couldn’t lend to them.”
James Beckwith, president and chief executive of Five Star Bank, said his bank hired two people to focus on small-business lending because he and other executives are very bullish on the local economy.
“Our criteria has never changed, in terms of credit metrics.” he said. “What’s happened is we’ve had a bigger emphasis on going out to try and get those kinds of loans. We’ve gone out in the marketplace in a much greater way looking for those small-business loans than we ever have before. We were, as an organization, primarily commercial real estate bank, but over the last six or seven years, we’ve become much more diversified. And we did that by focusing in on the small-business lending opportunities.”
As a growing number of healthy small businesses look for financing, competition has increased for their business. Credit unions are getting into the act. SAFE Credit Union, for instance, reports that it had $24.8 million in its small-business loan portfolio on July 31, up from $522,000 in December 2007. Financial institutions are offering introductory rates with 0 percent interest for limited periods and post-promotional rates below 3 percent to get new business. And, many companies don’t need SBA backing because their balance sheets and debt ratios look so good.
At Bank of America’s regional hub in Rancho Cordova, small-business executive Adam Kheder has put a team of 15 bankers in place to identify financing opportunities for clients whose companies have annual revenue between $250,000 and $5 million. Bank of America serves 60 markets across the country, and Kheder’s team ranks fifth when it comes to the size of its small-business loan portfolio.
“Typically, an average annual growth trend is anywhere from 5 to 10 percent (for small-business loans),” Kheder said. “We’re seeing upward of 20 percent. We’re seeing a huge rise in transportation ... and manufacturing.”
Kheder has made mostly traditional loans to local companies that manufacture electric toothbrushes, skis and dog food, he said. In 2015, BofA’s Greater Sacramento region toted up about $7 million in loans and $4 million in lines of credit, Kheder said, and he and his team is on pace to more than double that.
“We’re believing in our clients,” Kheder said. “We’re looking at ways to get the deal done. We’re not saying, ‘This is the cookie cutter, and if it doesn’t fit in this box, we’re not doing it.’ We’re saying, ‘Let’s expand outside the box, and let’s see if we can make a deal.’ ”