NORTH BAY -- Oakland-based microlender Oakland Business Development Corp. is now actively pursuing borrowers in the North Bay and beyond, bolstered by a new loan program backed by the U.S. Small Business Administration and by demand created in a financial climate that has pushed some lenders away from smaller loans.
The nonprofit's expansion represents the latest effort to fill what many say is an intensifying vacuum of providers in the smaller end of the loan size spectrum, with specialists like Oakland Business Development Corp. joining other organizations in launching expanded brands to serve those borrowers.
"Underserviced is an understatement. The credit market conditions for this kind of lending are a complete catastrophe," said Jacob Singer, CEO of Oakland Business Development Corp. "It's extremely difficult for even a successful, profitable company to get this kind of financing."
The 33-year-old Oakland Business Development Corp. has already begun lending to a handful of clients in the North Bay, operating in the nine Bay Area counties as Bay Area Small Business Finance (www.basbf.com, 510-830-3280). The nonprofit generates the majority of its business as bank referrals of borrowers that were denied a traditional bank loan, focusing on underserved and low-income clients.
Those loans range from $25,000 to $250,000, with fixed and variable interest rates from 7 to 10 percent and terms from three to 10 years and 25 years for commercial real estate purchases. Loans are available to new and existing businesses and usable for business acquisitions, equipment purchases, working capital and other common requirements.
Despite a focus on borrowers that some lenders would consider high risk, loan losses during the recession peaked at 3.4 percent and have averaged under 2 percent since 2009. Mr. Singer acknowledged that underwriting those loans required significant effort, but he credited the nonprofit's business model for making that work feasible.
"We're able to do it because we're effectively subsidized," he said, including charitable contributions from financial institutions, state and federal dollars and a long-term partnership with the City of Oakland. Borrowers are also required to provide a personal guarantee.
A number of converging trends have caused the availability of smaller loans to tighten during the recession. At a time of slim margins and intense scrutiny towards efficiency, lenders have been pushed to pursue larger accounts that generate a greater return on underwriting and origination efforts. In addition, many smaller businesses have been harder hit during the period, making those borrowers more risky for a cautious financial sector.
In the case of loans backed by the SBA in California, widely seen as a tool to encourage lending to small business and entrepreneurs, the average size of a loan has doubled to $540,000 since 2008, said Mark Quinn, district director for the SBA's San Francisco office, which oversees the North Bay.
To help address that trend, the SBA launched the Community Advantage program in early 2011. The program closely resembles the administrations flagship 7(a) program, authorizing Oakland Business Development Corp. and a small number of other non-depository lenders to provide those loans.
The loans carry a lower limit than 7(a) -- $250,000 versus $5 million -- but also guarantee up to 85 percent of the loan for lenders. Sixty percent of Community Advantage loans are required to go to businesses in low income and otherwise underserved areas.
"We could not see those loans being delivered by the regular for-profit 7(a) product," Mr. Quinn said. "We're trying to marry the mission of these nonprofits to the benefits of the 7(a) program."
Three lenders in California have begun offering the loans, accounting for 40 percent of Community Advantage lending nationwide, Mr. Quinn said. The SBA expects to see significantly more activity in the program during the 2013 fiscal year, following the deployment of the loan among a number of lenders.
"They see this product as an area where they have a significant volume expectation," he said. "They're rebuilding their organizations so that Community Advantage is a significant part of their business."
Oakland Business Development Corp. deployed between $8 million and $10 million in capital during the last fiscal year and was the 8th-largest SBA lender in the Bay Area by number of loans in fiscal year 2012, Mr. Singer said. Much of that lending was during the last six months, following the launch of Bay Area Small Business Finance.
The nonprofit is not the only provider of microloans -- defined by the SBA as $50,000 and below -- that has looked towards the North Bay for growth in recent months. Working Solutions, a microlender born from San Francisco-based 504 lender TMC Finance, opened a second office in San Rafael in October and has consulted on the subject of small loan availability with the Sonoma County Economic Development Board. TMC Finance is also authorized to offer the Community Advantage program and expects to deploy it in the future.
"As we looked at the landscape, we saw that there was a need for smaller loans in Sonoma County," said Ben Stone, director of the Economic Development Board. "There are a lot of smaller proprietorships and 'Mom and Pop' shops here in Sonoma County that don't need a lot of capital."
The development organization released a first-ever countywide survey of financial institutions in September, finding enduring caution towards lending to smaller businesses and announcing the formation of a task force to discuss ways to ease access to capital for those borrowers. The group is expected to present its ideas at the Economic Development Board's annual conference in June.
"Some of the pillars that banks have used historically, primarily second deeds of trust on an owner's residential property, a lot of that is gone," Mr. Singer said. "Very few people have enough equity in their homes now for that."