Billions in aid to banks not reaching many seeking loans
Lending giants tough on small-business owners
Last month, Tim Burr needed $35,000 to boost his small software company, so he applied for loans at
They turned him down.
“I thought, ‘I can’t believe this!’ These programs are supposed to help small business during tough times,’’ said Burr, chief executive of Scopic Software in Rutland. “They were no help whatsoever.’’
Now he has taken another route - seeking approval for a Small Business Administration loan from Middlesex Community Savings Bank, a 31-branch bank that did not receive bailout money.
Like Burr’s, many small businesses are having a difficult time getting SBA loans from lenders that took government handouts.
In addition to frustrating owners who say they need the money to survive, the banks’ reluctance to lend undermines a goal of the federal stimulus program: Ease the credit crunch so companies can grow and hire again. President Obama and Governor Deval Patrick, both citing the predicament of small businesses, have in the last week proposed separate plans to encourage lending.
Overall, US commercial and industrial loans declined from about $1.6 trillion in September 2008 to $1.4 trillion in September 2009, an 11 percent decline, according to the Federal Reserve. From Oct. 1, 2008, to Sept. 30, however, SBA loans in Massachusetts through the agency’s primary program - called 7(a) - fell 17 percent, from $197 million to $164 million, and the number of loans approved dropped from 1,349 to 1,195, with an average amount of $137,000.
Loan numbers typically drop during a recession because business demand is lower and banks become more conservative, especially when dealing with struggling companies whose credit has eroded. But the 7(a) program is specifically aimed at encouraging banks to take modest risks on credit-worthy businesses whose net worth is under $8.5 million, and in February it received $730 million in stimulus money to do just that.
The government backs the loans up to 90 percent of their value, but such transactions usually account for a tiny fraction of lending at national banks, mainly because they are geared toward making much larger and more lucrative loans.
Robert Nelson, SBA chief executive, said that while 7(a) loan lending remains down, the numbers are better than they were last fall and winter and he is optimistic they will continue to improve as the economy recovers.
Brian Bethune, an economic analyst for IHS Global Insight, a Lexington forecasting firm, said large banks that received bailout funds have turned away potential borrowers because they don’t have enough cash on hand. Stuck with so-called “toxic assets’’ - bad real estate and other investments - many banks have used bailout money to pay down debts.
“They’re not good places to go for a loan,’’ Bethune said. “They’re not really anxious to do that sort of business.’’
Bank of America, the largest bank in Massachusetts and the recipient of more than $45 billion in federal relief, made only 11 Massachusetts SBA 7(a) loans totaling $240,500 in the year ending in September, down from 54 loans totaling $1.6 million in the previous year. Citibank made eight loans totaling $2.4 million through the program in 2008, and one loan for $250,000 through the end of September. Its parent company,
Citizens Bank, whose parent
Other banks that do business in Massachusetts and accepted money from the government’s Troubled Asset Relief Program also slowed lending or offered no loans through the 7(a) program.
“That’s what has a lot of people on Main Street angry,’’ said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University Law School. “It doesn’t appear to them that bankers have suffered that much’’ because of the recession, he said.
Bank of America spokesman T.J. Crawford said the SBA loans constitute less than 5 percent of the bank’s small business loan portfolio. He declined to disclose the total number of loans the bank has made in Massachusetts this year or discuss the steep decline in its 7(a) program.
Mike Jones, a spokesman for Citizens, said the bank ranked second overall in 7(a) loan volume this year in Massachusetts, despite its overall decrease in SBA loans. He also said the British government’s bailout of the bank’s parent company, Royal Bank of Scotland, did not directly benefit Citizens, which functions independently.
Wainwright executives declined to comment. Calls to Citigroup, Central Bancorp, OneUnited, and LSB were not returned.
Some of the state’s smallest - and most stable - banks have been filling part of the lending void. Eastern Bank, based in Boston and with 80 branches, made 156 small business loans worth $7.3 million in the year ending in September. It did not receive any bailout money.
Richard Holbrook, Eastern Bank’s chief executive, said doling out money through the SBA is “really not a profitable business’’ but such loans meet a community need and introduce customers to the bank.
David Bennett, vice president of small business lending at Middlesex Community Savings Bank, said community banks have always been in tune with small business needs because they make lending decisions based on the needs of customers, not shareholders. Middlesex made 35 SBA loans worth $6.1 million in the year ending in September 2008, compared with 33 loans totaling $5.6 million during the same period this year, a 5 percent decline, compared with the 11 percent drop in the number of loans statewide.
“There’s been a lot of frustration among the community banks because all banks were painted with the same brush during the crisis,’’ Bennett said. “But we’ve continued to lend. And we continue to work closely with customers that are having financial trouble in this economy.’’
As a result, big banks may be losing credit-worthy customers to smaller counterparts.
Second-generation bread baker Nabil Boghos, for instance, said he wants to get a loan that will help him nearly double the size of his Woburn company, Jessica’s Brick Oven.
Boghos, whose father founded the pita-bread company Joseph’s Middle East Bakery Inc. in 1974, said he needs to borrow about $5 million to move to a larger plant and hire more employees, which will allow him to sell bread to the Hannaford’s supermarket chain.
But Boghos fears his bank, Bank of America, may say no, so he plans to apply for an SBA loan at a community bank as well.
“Nobody is willing to take a chance,’’ he said. “I don’t quite understand it. All these [federal] dollars that are being given to these banks. It seems like everybody is getting dollars these days.’’
Megan Woolhouse can be reached at mwoolhouse@globe.com. 
