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North Bay Business Journal

Monday, October 29, 2012, 6:30 am

North Bay, Bay Area have record-setting SBA year

Lending rises in region, falls in state

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    The volume of small business lending backed by the U.S. Small Business Administration in the Bay Area reached an all-time high during the last fiscal year, and volume for such loans in three North Bay counties grew by more than one-third.

    Bay Area lending through the SBA’s main programs, 504 and 7(a), totaled $1.2 billion, defying expectations that the sunset of temporary perks would cause levels to dip, compared with fiscal year 2011.

    That trend extended to the North Bay. Combined financing dollar volume for small businesses in Sonoma, Marin and Napa counties increased 36.6 percent to more than $108.3 million in the fiscal year that ended Sept. 30. Comparable data wasn’t immediately available for Solano, Mendocino and Lake counties.

    In Sonoma County, 102 loans totaling $68 million went to small businesses through the 7(a) and 504 programs; in Marin, 43 loans for $12.3 million; in Napa, 32 loans for $28 million; in Solano, 36 loans for $25.4 million; in Mendocino, 10 loans for $4.7 million; and in Lake, six loans for $1.4 million.

    “We’re the only district office that set a record in California,” said Mark Quinn, district director for the SBA’s San Francisco office, which oversees the North Bay. “I was surprised. In the rest of the country, volumes dropped off slightly.”

    Nationally, it was the second-largest dollar volume ever for loans backed by the SBA, with $30.25 billion in loans funded during the fiscal year. The all-time record, $30.5 billion in fiscal 2011, was due in part to temporary incentives that allowed the agency to guarantee up to 90 percent of a 7(a) loan’s value to a lender in event of a default.

    Surge in 504 loans

    The near-record volume for fiscal 2012 was driven in part by a surge in demand for loans through the SBA’s 504 program. Those loans, which include a portion secured by a certified development company plus a mortgage from a traditional lender, are typically used to provide long-term, fixed-rate financing for the purchase of large tangible assets.

    Until the end of the fiscal year, the same structure was also available for refinancing existing loans, requiring as little as 10 percent down and allowing significant extraction of remaining equity for reinvestment into business operations.

    The popularity of those provisions helped to launch Walnut Creek-based Bay Area Development Co. to the most active SBA lender in the North Bay, providing the government-backed portion for $24.8 million in 504 loans in Sonoma, Napa, Solano and Lake Counties. Nine of the company’s 28 North Bay loans were for refinancing purposes.

    “The biggest overall factor in increasing the number of companies that we could assist and the dollars that we could lend was due to the refi program,” said Jim Baird, CEO of Bay Area Development Co.

    Approximately 34 percent of the $15.09 billion in 504 loans nationally was attributed to the temporary program, with similar proportions seen in the North Bay. For the 23 refinancing loans that his company completed, Mr. Baird estimated that borrowers will save a combined $75,000 per month in occupancy costs.

    “It’s a lot of cash flow to be retaining for businesses so they can be adding inventory and creating jobs,” he said.

    While the program has expired as of Oct. 1, Mr. Baird and others said there are currently a number of efforts to lobby Congress to authorize a permanent 504 refinance program.

    For the 7(a) general business loan, the SBA’s most popular program, Santa Rosa-based First Community Bank financed the greatest dollar volume in the subregion for the second year in a row: 12 North Bay loans totaling $17.6 million. It is also year two of a conscious effort to boost the bank’s efforts in both SBA and traditional small-business lending.

    Small-business borrowers were financing more ambitious goals during the past year, reflecting a greater interest in business expansion and property acquisition at a time of convergence for low property valuations and low interest rates, according to Bryan Borders, senior vice president and small-business lending manager for First Community.

    “Those small-business operations that have weathered a down economy are looking for opportunity, and many of those opportunities are in facilities that they previously couldn’t afford,” he said.

    It is a trend seen across the country. The average loan size for both 7(a) and 504 loans in fiscal 2012 increased 13.6 percent to $561,766 from the prior year.

    Small-loans demand rises

    However, in the first part of the current fiscal year, Mr. Borders said he has seen an increased level of interest for smaller loans to finance more startups and entrepreneurial operations.

    “We’re seeing more confidence in the marketplace and more hiring,” he said.

    In response to increased demand for smaller loans, the SBA has created a new “small loan advantage” program. The program is anticipated to generate significant activity during this fiscal year, allowing rapid turnaround and large guarantees for loans up to $350,000, according to Mr. Quinn of the SBA.

    Redwood Credit Union, also based in Santa Rosa, financed the greatest number of 7(a) loans in the North Bay: $16.6 million for 26 loans in Sonoma, Marin, Napa and Mendocino counties. The lender nearly doubled the dollars it lent through the program compared with the prior year.

    “We’ve had a terrific year,” said Michael Downey, senior vice president of business services. “I think it speaks well for the continuing health of our local business economy.”

    Other lenders with a large amount of SBA activity in the region included Wells Fargo, with $12.8 million and 22 loans; Exchange Bank, with $5 million and 14 loans; and Sonoma Bank, with $4.7 million and eight loans.

    An increasing number of lenders have begun to offer loans backed by the SBA in recent years. In fiscal 2012, 110 Bay Area lenders participated, and regional SBA lending increased 78 percent since 2009, according to the SBA.

    Such loans not only insulate lenders from some risk, but loan guarantees sold on the secondary market are currently in high demand and are allowing lenders to retain capital in anticipation of increased regulatory requirements, according to Sherrill Stockton, senior vice president and SBA manager at Exchange Bank.

    Increased demand has also risen with the economy, she said.

    “Small businesses are healing and expanding,” she said. “To lend, we make borrowers go through the exercise of projecting their revenues and expenses going forward and explain how they adapted their business model to the new normal.”

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