The SBA’s loan program has gotten a bad rap, some bankers say.
True, loans guaranteed by the U.S. Small Business Administration require lots of paperwork. And they can take longer to approve than conventional bank loans to small-business borrowers.
But the loans don’t have to turn into a hassle – especially when the lender specializes in SBA loans, said Carrie Kosac, 1st Source Bank’s SBA and economic development manager.
Headquartered in South Bend, 1st Source made the most SBA loans in the state among banks with less than $10 billion in assets during the fiscal year ended Sept. 30. It’s the fourth consecutive year 1st Source has earned the distinction. The bank’s latest tally was 136.
That’s almost three times the number of SBA loans made by much larger lenders Wells Fargo and Chase, which ranked fourth and fifth respectively and operate bank branches throughout the state.
1st Source has branches in only 13 of Indiana’s 92 counties.
Kosac said handling the applications has become routine for her staff.
"Really, nothing is too small for 1st Source to use the SBA program," she said, adding that the bank processes applications for as little as $5,000.
Why go SBA?
New businesses need money to get started and keep the company going until it begins to make a profit.
Some borrowers have a tougher time qualifying for standard loans because they don’t have much collateral or they’re entering a highly competitive field, such as the restaurant business.
Small-business owners can get free advice from various organizations on what they need to succeed, including the Northeast Indiana Innovation Center, SCORE and Community Development Corporation of Northeast Indiana.
Linda Smith, who retired after 35 years in commercial lending, is among the volunteers who mentor entrepreneurs through SCORE, the Service Corps of Retired Executives.
Smith, who was executive director of the local Community Development Corporation office for six years in the 1990s, has referred numerous clients to the SBA program. It’s good for those with good personal credit scores, experience in the industry they’re entering but little collateral, she said.
"SBA loans have helped a lot of small businesses get started and expand where they probably wouldn’t have been able to (otherwise)," she said. "It’s a great program."
The SBA’s loan program was founded in 1953 but traces its origins to the Great Depression, when the federal government stepped in to help large and small businesses hurt by the financial crisis.
Small businesses earned special attention when they found it hard to compete with large manufacturers that won defense contracts during World War II, according to the organization’s website.
The program guarantees up to 85 percent of loans made to small business borrowers who meet certain requirements. Getting that guarantee allows banks and credit unions to lend money to applicants that don’t meet conventional lending criteria.
The paperwork volume keeps banks and borrowers from seeking SBA guarantees when they aren’t necessary. The SBA also charges borrowers 2.25 percent to 2.75 percent above prime interest rates to participate in the program.
Borrowers who don’t go through the SBA program don’t have to pay that fee, but such borrowers typically can’t qualify for a bank loan.
Increased access to capital is huge, said Kosac, who is also a bank vice president. But other borrower benefits include the potential for longer loan terms and protection from balloon payments. Lenders typically can call a loan, requiring that the full amount be paid off after three or five years, for example. But the SBA doesn’t allow such balloon payment requirements, she said.
Larry Mayers, 1st Source’s Fort Wayne region president, said some borrowers fear the SBA process will be complicated, intrusive and slow.
"It’s not like it was 20 years ago," he said. "It can be streamlined and easy."
Finding a niche
1st Source isn’t the only lender specializing in Small Business Administration-guaranteed loans.
The lender making the most SBA loans in Indiana – 315 – isn’t even headquartered in the state.
Huntington Bancshares Inc., a $101 billion regional bank holding company based in Columbus, Ohio, made 315 SBA 7(a) loans in Indiana during the last fiscal year. The dollar value totaled more than $43.9 million.
Huntington National Bank, the company’s main subsidiary, operates northwest Ohio branches in Paulding, Edgerton, Bryan and Defiance, among other locations. The branch closest to Fort Wayne is about 30 miles away.
The bank more than doubled the number of SBA loans 1st Source made in the state, but it’s also 20 times larger, based on assets.
Most banks in the state didn’t come close to matching the pace set by 1st Source, a preferred SBA lender. That means the bank can go ahead and approve loans without getting SBA’s permission first – as long as it follows SBA criteria.
iAB Financial Bank, for example, has about $1.1 billion in assets. That makes the Fort Wayne-based bank about one-fifth the size of 1st Source.
During the last fiscal year, iAB made only three SBA-backed loans in Indiana. That’s 2 percent of the number 1st Source made.
Mike Marhenke, iAB’s president and CEO, said increasing SBA loan activity is in his bank’s strategic plan and has been for a couple of years. He expects it will bubble up to a higher priority in 2017.
"It was the marketplace that we didn’t tap into," he said. "We missed opportunities, I think, to grow our loan portfolio with the help of SBA."
But it isn’t an area that banks can wade into overnight.
"It is something that you need an expertise in," he added.
In the past year, iAB’s goal has been to increase commercial and industrial lending, a goal it has met, the CEO said. The lender hired two loan officers with an expertise in that area. Marhenke plans to hire loan officers with SBA lending experience.
Experience counts, Kosac said.
1st Source staff keeps up with changes in the program’s requirements, something she believes other lenders could struggle with if they don’t use the SBA program often.
"We have in-house expertise," she said. "It is quite a dynamic program that is constantly changing."
At a glance
The following listing shows Small Business Administration loan volumes for lenders with a presence in northeast Indiana. The ranking is based on the number of loans made to Indiana borrowers from Oct. 1, 2015 to Sept. 30, 2016.
|Statewide ranking||Lender||Number of loans||Dollar value|
|2.||1st Source Bank||136||$9.84 million|
|4.||Wells Fargo Bank||54||$18.4 million|
|5.||Chase Bank||51||$10.5 million|
|8.||Lake City Bank||37||$3.71 million|
|10.||Centier Bank||31||$4.95 million|
|14.||Fifth Third Bank||24||$3.03 million|
|15.||Old National Bank||21||$19.3 million|
|16.||Star Financial Bank||20||$4.93 million|
|17.||PNC Bank||19||$4.72 million|
|21.||First Federal Savings Bank||14||$8.80 million|
|46.||Community State Bank||4||$3.39 million|
|56.||Salin Bank & Trust||3||$683,000|
|58.||iAB Financial Bank||3||$357,000|
|71.||3Rivers Federal Credit Union||2||$325,000|
Source: U.S. Small Business Administration