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Probably the toughest part of starting and running a small business–convincing a bank to loan you money–has gotten even harder in recent years. Banks have tightened credit, and loans to small businesses are down to a trickle. Minority businesses are even harder hit, getting turned down more often and facing less favorable loan terms–if they can get credit. We talk about the options out there for entrepreneurs trying to build a business in tough times.
- Nicholas Stewart Director of Finance, New World Development Group
- Bryant Ruiz Switzky Senior Staff Reporter, Washington Business Journal
- Bridget Bean District Director, Washington Metro Area Small Business Administration; Acting Regional Administrator
- Bill Cheney CEO, Credit Union National Association
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Starting and running a small businesses is more challenging than ever. The economy still hasn't rebounded. Credit has tightened, and banks aren't lending. And that's especially true for small businesses applying for loans.
MR. KOJO NNAMDIEven though banks can get those loans guaranteed by the Federal Small Business Administration, many banks are choosing to lend only to bigger and more established businesses, leaving many small business owners complaining that banks are only lending to businesses that don't actually need the money. But there are some resources out there for small businesses, including alternatives to established commercial banks.
MR. KOJO NNAMDIJoining us to have a conversation about this is Bridget Bean, district director of the Washington Metropolitan District Office for the U.S. Small Business Administration, SBA. She's also the regional director for our five-state area. Bridget Bean, thank you for joining us.
MS. BRIDGET BEANThank you for having me.
NNAMDIAlso with us in studio is Bryant Ruiz Switzky. He is senior staff reporter with the Washington Business Journal. Bryant, thank you for joining us.
MR. BRYANT RUIZ SWITZKYPleasure.
NNAMDIYou, too, can join this conversation. 800-433-8850 is the number to call. 800-433-8850. Do you have a small business? What challenges have you faced with financing? You can also send us a tweet, @kojoshow, email to firstname.lastname@example.org., or go to our website, kojoshow.org. Join the conversation there. Bridget Bean, there are a lot of misconceptions about the SBA. A lot of people, for instance, think the SBA actually makes loans. Can you explain what the SBA is and what its role is for small businesses?
BEANAbsolutely. The Small Business Administration has been around since 1953, and our mission has remained the same: to help grow small businesses in the United States to create a very strong economy. But we don't do direct lending. We guarantee loans made by commercial lenders, by nontraditional lenders and by credit unions. So our role is to create an environment where lenders are more likely and more confident to make those loans when a portion of it is guaranteed by the SBA.
NNAMDINevertheless, there is the continuing widespread misperception that SBA somehow makes loans.
BEANWell, educating the American populace on what the SBA does is a constant challenge for us, so we are trying to get out there in the communities through chambers of commerce, shows like this, to get the word out and to make sure that people can find the resources they need.
NNAMDIBryant Ruiz Switzky, credit, as we know, has tightened, and many people, including small business owners, are finding it difficult to get loans. Yet local banks are reporting large profits. What's going on?
SWITZKYWell, the -- it's not the same story for all types of lenders. We have seen sort of a different -- in terms of wax and wane of lenders, actually, a lot of the large banks, you know, the Bank of Americas and Wells Fargos, a lot of those lenders really pulled back it -- for various reasons on their lending and -- but a lot of the smaller lenders that are based here locally, community banks, for example -- actually, local community banks, lending has grown continuously throughout the downturn. But they represent a fairly small slice of all the loans that are made.
NNAMDIYou know, Bridget Bean, given that this is an election year, small business comes up a lot in the political rhetoric, if you will. Exactly what is a small business? We know that most American businesses are small businesses, but how is a small business defined?
BEANWell, it often depends on you ask. But, as far as the Small Business Administration is concerned, it's based on revenue, an average revenue of their last three years, which is about $7 million. That's -- when we look to administer our programs and services, we're looking at small businesses in that general area where over the last three years the average has been about $7 million. But each -- it's dependent on each industry code, and we define that for small businesses.
NNAMDIThe FDIC defines small business loans as those with balances of $1 million or less. The big banks go up to $20 million. The Federal Reserve goes up to $50 million. But we're talking here about the Small Business Administration, $7 million about which we're looking at.
BEANOn average. Mm hmm.
NNAMDIWhat does the small business picture look like in our region in general? First you, Bridget Bean, and then you, Bryant.
BEANWell, for the greater Washington metropolitan area -- and this is also true for the mid-Atlantic area -- it actually is looking very, very good. Our lending is back to pre-recession levels, both in dollar and in number amount. Small businesses are starting and growing. We're seeing job creation coming out of a lot of small businesses at the mom-and-pop level, Main Street, but also in some of the high-growth industries that are still very, very, very productive for small businesses.
BEANSo we're seeing a lot of hiring in small businesses. We're back to pre-recessionary level lending, and we're seeing a lot of innovation come out of small businesses, which, I think, is going to be very beneficial to government agencies. Especially as budgets reduce, that innovation is going to be critically important. And I think there's a lot of great opportunities for small businesses right now in this area.
NNAMDIAny particular small business types that are expanding in the Washington area or in the District in particular?
BEANI think one of the beautiful things about this area is the diversity of small businesses. We have everything from high tech, biomed, and we have the intelligence industry. We've got -- in D.C., it's really exciting because the fashion industry is growing up here. I predict that the fashion industry in the District of Columbia is going to be -- is going to compete with New York. So we have great diversity in the small businesses. And I think that's what -- that is a key element in why we are so successful in recovering from the economic downturn.
NNAMDIGetting men out of dark suits and white shirts...
NNAMDI...but, Bryant, same question to you. The small business picture in our region in general, what does it look like?
SWITZKYOverall, the D.C. area has done much better than other parts of the country. We've been insulated because of the federal government, of course, which has expanded for the most part. But the challenge is -- I agree that overall the trends seem to be pretty positive. But there's a lot of uncertainty that is causing a lot of small businesses to hesitate in terms of making that investment and to jump ahead into the next thing, not least of which is these questions about what's going to happen in the government contracting industry.
SWITZKYAnd the, you know, the inevitable -- everybody pretty much agrees that the overall size of the industry is going to be declining, and a lot of these small businesses are subcontractors for a lot of these big government contractors. And there are a lot of questions about what's going to happen to these contracts that they rely on as the government may downsize, as the Pentagon downsizes, all these things happen.
NNAMDI800-433-8850. We're discussing small businesses and small business resources in our area. Have you tried to get a small business loan? Did you succeed? Care to share your experience with us? 800-433-8850 or shoot us an email to email@example.com. Bryant, another issue, of course, or one of the major issues is that many banks, especially since the financial crisis, don't seem to find small loans worthwhile.
SWITZKYYeah. When you look at these -- look at some of the numbers -- SBA lending data is something I spend a lot of time looking at as, of course, Bridget has too. And you see this trend, if you look at the average loan size over the years, that it's just grown and grown and grown. And part of that is that it takes about the same amount of work for a bank to lend you a million dollars as it does for them to lend you $50,000.
SWITZKYBut they don't make nearly as much money off of it. And during these tighter times, a lot of the financial institutions are choosing to focus on these profitable, larger loans. And these people who are looking for less than, you know, $100,000, a lot of these mom-and-pop shops are just kind of left hanging.
NNAMDIYou -- go ahead, Bridget Bean.
BEANI just want to -- that's absolutely true, and it's been a real issue of concern for the SBA. And so under the strong leadership of Karen Mills at the SBA, we've looked at some of our products, and we're just rolling out on June 1 Small Loan Advantage 2.0, as we're calling it.
BEANAnd what this does is it's going to allow lenders in our area to make those smaller loans with a higher guarantee using their own forms, really streamlining the process because we do realize that if, you know, it costs the same to make a $50,000 loan as it does a $50 million loan. So we need to make programs offered by the SBA -- make sense to our lenders.
BEANAnd so under this Small Loan Advantage 2.0, that's exactly what this going to do, to allow bankers to make loans up to $350,000, one form for the banker, one form for the borrower and an eligibility checklist. And with an 85 percent guarantee for $150,000 or less, we think that this will really entice the banks to do it. And we built this program based on feedback from lenders. So we're really trying to be responsive and relevant to the lenders.
NNAMDII'd like to talk a little bit more about Small Loan Advantage, especially how it could be of help to the small businesses that are, in fact, represented by Nicholas Stewart. Nicholas Stewart is the director of finance with the New World Development Group. He talked with us this past Friday, and here's what he had to say.
MR. NICHOLAS STEWARTThis is Nicholas Stewart. I serve in the role of director of finance for New World Development Group. New World Development Group is a general construction firm headquartered in Southeast Washington, D.C., in the Anacostia neighborhood. We focus on general contracting and as well have created a drywall installation division that focuses on some of the large-scale projects that are going on around the city.
MR. NICHOLAS STEWARTAs we went about trying to pursue financing, one of the difficulties that we ran into, as our business had slowed down substantially, a lot of banks were looking back at historical information and basing their lending decisions purely off our, you know, last 12 months' revenue. And in our case, just as every other firm had a sharp decline in their last 12 months revenue, they were unwilling to, you know, provide the capital rather that we needed to kind of get ourselves back on track.
MR. NICHOLAS STEWARTAnd one particular story that I think was kind of almost comical is one very large bank -- I won't name their name -- but one of the largest firms based on assets, yeah, the lending personnel I was speaking with was telling me that, unfortunately, my, you know, financial metrics just didn't meet their standard, and they wouldn't feel comfortable lending to me.
MR. NICHOLAS STEWARTAnd I responded to him, well, you know, when the federal government loaned you substantial amounts of money and bought your equity after you guys had lost billions of dollars, it doesn't seem like such a hot investment, did it? He got kind of quiet when I, you know, threw that logic back on him. But that didn't get me very far. And in another conversation I had with a -- more of a local kind of regional lender, I got as far as the chief lending officer and had a very frank conversation with him.
MR. NICHOLAS STEWARTAnd essentially, he told me he was under such pressure from the investing community that he was under such pressure that he would have to show a loan loss in a given quarter of several hundred thousand dollars that his stock would lost 10 or 15 percent. So he could only make loans essentially to people that didn't need the money, and that was his quote.
NNAMDINicholas Stewart, director of finance with the New World Development Group, he spoke with us this past Friday. Today, we're speaking with Bridget Bean, district director of the Washington Metropolitan District Office for the U.S. Small Business Administration. She's also the regional director of our five-state area. And Bryant Ruiz Switzky, senior staff reporter with the Washington Business Journal. Bryant, tell us about Nick's situation. He's trying to win a bid. He's almost got it in hand, but he can't get the loan to scale up. How common is this?
SWITZKYI think that it's pretty common. For a company that is in a situation like his, they're in the construction business, an area that was hit hard by the downturn, so they showed some declines in revenues and whatnot. But then they've got this opportunity to ramp back up. He was going to hire a dozen people to fulfill $5 million in contracts with a major construction company and had the contract and how to do it and just needed the money so he could afford to hire the people.
SWITZKYAnd what wound up happening is that he got turned down by 10 banks is what he told me. And they wound up having to fund it through their own, you know, they're going through friends and families and finding whatever means that they could, and wound up having to scale back the contract pretty significantly and, you know, didn't hire as many people as they would have. And, I think, unfortunately, this is pretty common.
NNAMDIBridget Bean, you talked earlier about Small Loan Advantage. I guess I have a two-part question. On the one hand, one of the issues many small businesses say they have with the SBA is the timeline, that it simply takes too long, 90 days they say, and a business might lose a contract bid by then. That was one of the reasons that Nick, who we just heard from, said he didn't look for an SBA-backed loan. Should he and would Small Loan Advantage be able to help him in that situation?
BEANWell, absolutely. You know, part of the problem is perception, and we all experience both in our personal lives and our professional lives. Once something happens, you forever battle that perception. So, years ago, it did take a very long time to get an SBA loan approved, but that's just not the case anymore, especially under Small Loan Advantage 2.0. And that's why we've reduced the number of forms for one for the banker, one for the borrower and an eligibility checklist -- allow the banker to use all their other forms.
BEANThey come to us, and it's a 24- to 48-hour turnaround time for most of these loan approvals. So to hear a story like Nick, it's saddens me, as you can imagine. But it also make me very excited for opportunities like this where we can talk about the new SBA and the things that we're doing to be more relevant to small businesses and the lenders that serve them. And studies show the importance of small dollar loans to small businesses and to communities and especially in underserved communities.
BEANSo this program is really important to us at the SBA 'cause we know this is a critical part of our mission to get money into the hands of small business owners and underserved communities. I did want to mention one other thing. We redesigned another program recently because we found it...
NNAMDIThe Community Express Program.
BEANActually, I was going to talk about our CAPLine Program, if you don't mind, only 'cause it's Nick's situation.
NNAMDIWell, I don't mind.
BEANThis is a program where banks can use government contracts as receivables. So you can -- if you've got a contract, they can -- the bank can take that as the receivable. And this is really important, especially for mobilization, which was Nick's problem. You know, you get this great opportunity and you need to hire people, but you don't have that kind of cash. And you know it's going to be 30, 60, 90 days until you get your invoice paid. The new CAPLine can help businesses like Nick's, and we can also...
NNAMDINow, he didn't actually have a contract in hand, but he was a finalist. So that was pretty close, I guess.
BEANMm hmm. I think it's pretty close. And if you work with lenders in the area who understand government contracting, which is a very unique perspective in lending, they will look at the CAPLine. And it's been redesigned. And in this area, in the past 20 years, we did about four. Since the new program was rolled out in October, we've done about 37 loans, and 53 percent of all those loans are in manufacturing and in construction.
BEANAnd, for me, that says two things. One, two indicators that our economy is rebounding and, two, we now have a loan product for those two industries which heretofore have been very difficult to fund.
NNAMDIA crucial part, Bryant Ruiz Switzky, of what Bridget Bean just said is local government's understanding -- local banks understanding government contracts. How crucial is that?
SWITZKYWell, it's very crucial. It's really a specialized form of lending because of what, you know, she mentioned. It's -- you have these contracts that you often don't get paid on for a long time out. And, usually, they're done through this type of lending that's called essentially asset-based lending, where they basically -- they focus on the receivable, the contract that you have as opposed to -- that becomes sort of the collateral for the loan as opposed to, you know, your building. If you're buying a building, you know, that building would become collateral, so...
NNAMDIBut if don't yet have the contract, but I do have -- I'm a finalist in the contract, what does that say to the bank about the possibility or likelihood of me actually getting the contract?
SWITZKYWell, I'm not sure exactly what it says about the likelihood of getting it. But the bank can easily -- can write the contract to say that the loan is only good if you actually...
NNAMDIIf you got the contract.
SWITZKY...get the contract. I mean...
NNAMDIGot it, yeah.
SWITZKY...they don't have to lend you the money if you don't actually have the contract.
NNAMDI800-433-8850. We're going to take a short break. But if you have any small business experience, do you have a loan backed by the Small Business Administration? Did you find help through government programs, non-profits or other resources for your small businesses? Give us a call, 800-433-8850. Shoot us a tweet, @kojoshow, email to firstname.lastname@example.org or make a comment, ask a question at our website, kojoshow.org. I'm Kojo Nnamdi.
NNAMDIWelcome back to our conversation about small business resources in our area. We're talking with Bryant Ruiz Switzky, senior staff reporter with the Washington Business Journal, and Bridget Bean, district director of the Washington Metropolitan Office for the U.S. Small Business Administration, SBA. She's also the regional director for our five-state area.
NNAMDII mentioned earlier, Bridget Bean, the Community Express Program. That program has been replaced and modified by which you describe as the Small Loan Advantage Program. But talk a little bit about the Community Express Program. What purpose did it serve?
BEANThe Community Express Program is actually for non-bank lenders, non-profits, community-based, mission-based organizations that have a lending component, and they serve a critical role as well because they know the members and the community. They take a holistic approach to their lending. It often involves technical assistance. So it's an important program for our agency. And the Small Loan Advantage is for traditional lenders. So community is for non-profits, mission-based and the Small Loan Advantage is for traditional bankers.
NNAMDIBryant, the original Community Express Loans were important for the African-American community. You did a series on lending to African-American owned businesses. Before we go to the phones, can you talk about that?
SWITZKYYeah, absolutely. So Community Express -- and, I think, you may have been talking about Community Loan Advantage, Bridget...
SWITZKY...which is different from Community Express. There are all these different names. It sort of sounds similar. Community Express was a pilot program the SBA had for, I think, 12 years, and it was cancelled last year. And it -- because there were found to be substantial problems with it, this inspector general report that came out. But Community Express was a program that was used by lots of banks to make loans, particular to underserved areas.
SWITZKYAnd in this area, the vast majority of them, more than three-quarters of the Community Express loans made in this area, at least since 2000, were to African-American owned businesses. And there were -- I did a -- I dug into some of these numbers and found that there were some significant issues with this, in particular in terms of the incentives. This is one of the things that the inspector general report found that with these -- the way that the program was structured for it encouraged lenders to make smaller loans for one thing.
SWITZKYAnd for loans of less than $25,000, they could get additional benefits for doing it. And it was structured in such a way that lenders could make business a loan, and, even if the business defaulted right away, the lender would still make money. They did this by selling upfront fees. They also sold off the guaranteed portion of the loan into the secondary market and got a premium for that. And they were allowed to charge higher interest rates for smaller dollar loans.
SWITZKYSo it encouraged this huge amount of small dollar loans, the vast majority of which went into the African-American community, and the default rates were enormous. There was a lender in particular called Innovative Bank based in California that came here in '02 or '03. It was by far the largest lender to African-Americans in this area. It made 1,200 loans, more than half of which wound up going bad, defaulting.
SWITZKYAnd this has major ramifications for all those business owners in terms of their credit. They may, you know, be -- have judgments against them in court and all of these things and having their assets seized. And the way that the program was structured, Innovative could've still made money off of those loans even if the borrowers defaulted right away.
NNAMDIIt was a win-win situation for Innovation, but so much for the business owners. You had trouble getting the data to look at how African-American owned businesses were faring in terms of loans and credit, however. What did you do?
SWITZKYYeah, so it's kind of a weird thing. We hear all at -- not all the time -- but often enough about discrimination in lending, particular in consumer lending. We hear a lot about it in mortgages. You know, Bank of America had this huge settlement in December related to that. You know that they were charging blacks and Hispanics higher interest rates and fees than similarly qualified white borrowers. But you don't hear about that in business lending, and the reason is because there is no data, and no one is paying attention.
SWITZKYThe Federal Reserve used to have this survey that they put out to small businesses which researchers could use to basically examine whether there was evidence of discrimination. And from what I was told, pretty much every researcher, whoever looked into it, found that there was evidence of discrimination in small business lending. But the Federal Reserve cancelled the survey back in 2003, I believe, and hasn't replaced it since then.
SWITZKYAnd as a result, there is a real lack of data. The SBA data that I put together for my report is one of few sources of data you have. But, of course, SBA lending comprises a fairly a small slice of lending overall, and it doesn't have information about, you know, the applicants who weren't -- who were denied and such and such. So it's certainly not perfect, but it suggests that we need -- we could use some more information.
NNAMDIWell, the Dodd-Frank consumer protection law does include a provision that will require banks to collect data on race, gender and ethnicity for all loan applicants. Can that assist in the future?
SWITZKYDefinitely, that's huge for this. The thing is we don't know when that's going to be implemented. There isn't a timeline in the law for when that provision must go into effect. So it may be a while.
NNAMDIGot to get back to the phones. Mike in Alexandria, Va., you're on the air. Go ahead, please.
MIKEYes. This is slightly off topic, but I wanted to mention that a lot of us who have small businesses and some amount of purchase orders have been using something called a Receivable Exchange which is -- used to be a startup out of New Orleans, has been around about three, four years now. And it's much cheaper than factoring or assets-based lending. You can get money for half a percentage point, a percentage point, so just wanted to say that there are other ways to get money if you end up with a large PO from a particular reputable customer.
NNAMDIAny familiarity with Receivables Exchange as a way of getting money, Bridget Bean?
BEANNot that particular organization, but, you know, that's the beauty of how strong our country is. There are a lot of opportunities for small businesses to get access to capital. And one of the things we do at SBA is we do counseling and training, and it's a very important role we play. And through that, we can identify who is the appropriate lender. And it can be a micro lender, it can be a credit union, it can be a community bank, a regional bank, a national bank, a mission-based lender, and we know who's lending in what areas and what their sweet spot is.
BEANAnd that saves -- like the story that Nick, where he went to 10 banks, some of them might just not have done that kind of lending. So one of the things we do is we counsel and train small businesses. Are you bankable? What do you want to take to the bank, and then who should you approach because who's lending in your industry and in that dollar amount? So I think we're very lucky to have a lot of resources, and SBA can help target small businesses to the right resource.
NNAMDIThank you for your call, Mike. On to James in Alexandria, Va. James, your turn.
JAMESOK, great. Yeah, I wanted to say -- well, I'll tell you a couple of things first. There's three most important people that most people need to know but don't is your banker, your accountant and your attorney. And people are so scared to talk to them that oftentimes they lose out on opportunity just because they're not familiar with their banker. For example, I own a small business, and we were able to recently get -- we have originally had a line of credit that was secured by real estate which basically went -- end up being absorbed by this for starter capital.
JAMESBut we are recently approved for a line of credit that was basically secured through receivable. But I believe that that main reason why that happened is because we've developed a relationship with our banker. He got to know how our business worked. I always go inside and make sure that they see me rather than go on through the drive thru. And I facilitated a close relationship between my banker and my accountant, so they'll tell me about things that I find that a lot of my other friends that own businesses don't know about simply through relationship rather than anything else.
NNAMDIWell, what you describe, James, sounds like a relationship with a friendly neighborhood banker. How common is that? Starting with you, Bryant Ruiz Switzky.
SWITZKYWell, banking is definitely a relationship-based business, and there isn't a bank in town who won't tell you that they're -- they have the best customer service of all the banks. But, of course, it's not true that -- what you find, though, is that the distance between the person, the lender, that you are talking to, you know, about whether or not you want your loan and the person who ultimately makes the decision, that distance can be very far, or it can be relatively short depending on the institution that you go to.
SWITZKYLarger institutions generally use -- it's mostly a formula. There's a box that they put in particular numbers about your, you know, your debt ratios and your cash flow and whatnot. And it sort of spits out at least your preliminary answer about, yes, you do or you don't qualify. And a lot of people never get past that point. It's not about convincing a person about your story.
SWITZKYIt's about, you know, whether the numbers work out. But smaller community banks tend to not rely on that method, and there is a little bit more judgment involved. Credit unions would be this -- there are some credit unions who do business lending, and that would be the case there also.
NNAMDIWe'll be talking with the CEO of a credit union association later on in the broadcast. Bridget Bean, I don't know if you wanted to add anything to that.
BEANOh, absolutely. That's great advice. The caller had great advice. The three people -- we call it the three-legged stool for successful business, to have a great banker, a good accountant and an attorney. And we encourage businesses to build that relationship with a banker. They've got to share your vision. They have to understand your passion. They have to be knowledgeable about your industry. And it's true. We also encourage them to know who the business banker is in where they bank.
BEANSo the branch manager may not know all about the business loans that are available, so ask to be introduced to the business banker, or call the SBA. We keep contacts with all of the business bankers. And that's who you want to make sure understands where you're going, what your market research is, what is your business plan. So it's great advice. The caller was absolutely spot on.
NNAMDIJames, thank you very much for your call. We have an email and a question from a listener on the air. So I'll start with the email first. It's from Rowan (sp?). And Rowan said, "We've just been approved a business loan through two lenders, a purely private bank and an SBA-backed bank. The SBA loan has better rates, but we have the impression that there will be a lot more fees and a lot more hoops to jump through in actually closing the deal. How accurate is that perception?"
NNAMDIAnd let me see if I can pick up on Maddy (sp?) here in Washington, D.C. No, Maddy is not coming up, but if you respond to Rowan, you might also be providing an answer for Maddy who says -- Maddy says she or he had a difficult time doing business with the SBA, hoops to jump through.
BEANWell, hopefully I think the small business person said they perceived some hoops and additional things, so, hopefully, we can resolve those perceived hoops. But with our new small loan advantage 2.0, the closing and disbursements of those loans will follow the same closing and disbursement procedures and documentation that the bank has. So we're adding no additional paperwork or hoops with regard to the closing and disbursement of the loans.
BEANSo this is something that SBA's heard loud and clear, and the administrator has issued a mandate to streamline what we do. We want to make it easy for small businesses to get loans, and part of that is allowing lenders to use their own forms or own procedures, their own underwriting which will save time and money both for the lender and for the small business person.
NNAMDIAnd we got this tweet, "Our lender was ignorant of many SBA rules and/or flat out dishonest. Who at SBA is interested in feedback of this sort?"
BEANWell, one of them is sitting right here in front of you. And I would -- I implore people to email me at email@example.com and tell me of those instances 'cause we want to do two things: we want to continue to educate our lenders, and then we want to correct any problems that may exist. There's no room for waste, fraud, abuse or mismanagement of programs administered by the federal government. So we need to educate on the proper ways to do it and correct things when they aren't working properly.
SWITZKYOne thing I wanted to say, too, is that I -- I mean, SBA lending is a particular skill that a lender either has or doesn't have, and I would say it's safe to say that most lenders probably don't have. If the person that you're talking to isn't familiar with SBA loans, they're just -- they're not the right person to help guide you through the process because there's a lot to know. And if it's not something that you specialize in or that you've done a lot of, it's not too surprising that a lender would be very unfamiliar with the programs.
BEANWe have a quick new thing on our website at sba.gov. If you put in your zip code, it will direct you to resources in your neighborhood. And so if you put in your zip code, you'll find out SBA lenders who are in your area, resource partners who can help you with business plans, et cetera. In that way, you'll be in touch with people who do understand the SBA programs and services.
NNAMDIBridget Bean is the district director of the Washington Metropolitan District office for U.S. Small Business Administration. She joins us in studio with Bryant Ruiz Switzky, senior staff reporter with the Washington Business Journal. You can shoot us an email if you have comments or questions to firstname.lastname@example.org. How did you finance your small business? You can send us a tweet, @kojoshow, or go to our website, kojoshow.org. Join the conversation there. I'm Kojo Nnamdi.
NNAMDIWelcome back to our conversation on small business resources here in our area. We're talking with Bryant Ruiz Switzky. He is a senior staff reporter with the Washington Business Journal. Bridget Bean is the district director of the Washington Metropolitan District office for the U.S. Small Business Administration. She's also the regional director in our five-state area.
NNAMDIWe're taking your emails at email@example.com. Do you have a loan backed by the Small Business Administration? Share your experience with us. Bridget Bean, are there special programs for minority and woman-owned businesses at SBA?
BEANThere are. There are programs to help women-owned small businesses and minority small businesses. The 8 (a) Program, which you may be familiar with, is a nine-year long business development program in which socially and economically disadvantaged small businesses can enter into the program and be really guided through that nine-year journey with a special ability to compete for government contracts in a reduced sphere.
BEANAnd we just rolled out our new women-owned small business contracting program where, for the first time ever, small business or contracts for the federal government can be set aside to be competed among women-owned small businesses exclusively. We know that women-owned small businesses are not getting a fair share of the federal government pie. And so this program, which was part of a law, has been enacted.
BEANAnd it's a way to really level the playing field for women-owned small businesses and minority-owned small business through the 8 (a) Program. So it's really important that we take it from a holistic approach and make sure that we provide small businesses, the opportunity to learn about business development 'cause just 'cause you get a contract, we want them to be successful through that contract and beyond.
NNAMDIThere are a range of different levels of lending. Can you briefly explain the role of micro lenders, community lenders, regional banks, national banks?
BEANAbsolutely. It's one of the things that we at SBA feel is very, very important, and that is to meet the entrepreneur where they are. And to do that, we have to have different types of loans available depending on where that small business is on their journey. So micro loans up to $50,000, we have a set of lenders who specialize in micro lending up to the $50,000 range.
BEANAnd then once you grow past that, we've got small loan advantage, which goes up to $350,000. And then our regular 78 lending, which goes up to $5 million -- so it's really important that we have the whole spectrum of lending amounts to meet the need of the small business.
NNAMDIBryant, SBA lending makes up only a small slice of all commercial lending. Where else do small business owners turn for money?
SWITZKYWell, the -- they go to their bank, and the bank gives them a small business loan. It's just that most of the small business loans that banks make are not guaranteed by the SBA. They're just a loan that the bank is deciding. It's going to do without a government guarantee. And I think that most banks don't use the SBA, if that's fair to say. The lists of lenders that do SBA -- have made SBA loans in the past year is, you know, there are dozens but certainly relatively small compared to the lists of all the lenders that do loans here.
NNAMDIAnd, of course, the lenders that do business with SBA firms are in the PLP category if they make a -- if they do it on a fairly regular basis?
BEANAbsolutely. We have preferred lenders who make more than 20 a year and have an excellent track record. So they're allowed to use all of their own forms, and they actually do the approval based on their own underwriting and criteria. And they come to us for a loan authorization. And then we have our non-PLP lenders who prepare the package, submit it to SBA, and we give the approval.
BEANIn the greater Washington Metropolitan area, we have about 136 participating lenders, which is pretty good for the greater Washington Metropolitan area. And we're seeing, in the last 12 to 18 months, banks who have never made an SBA loan before come on board. So we are recruiting new lenders all the time, and they're your community banks. A lot of credit unions have joined the SBA program, so we're very excited about the new lenders that are coming into the program.
NNAMDII'm glad you mentioned credit unions because joining us by phone right now is Bill Cheney, CEO of the Credit Union National Association. Bill Cheney, thank you very much for joining us.
MR. BILL CHENEYThanks for having me. Great to be with you.
NNAMDIBill, what's the difference between a credit union and a standard commercial lender?
CHENEYWell, credit unions are different in that they're not-for-profit cooperatives, so they're owned by their members. But in terms of their loan programs, many credit unions make business loans. And as Bridget just said, more and more credit unions are making SBA loans.
NNAMDIWe've been talking about the fact that commercial banks seem to have dramatically slowed lending to small businesses since the financial crisis. What about credit unions?
CHENEYWell, it's very interesting. Credit unions have actually expanded their business lending. In fact, from the beginning of the financial crisis till the end of last year, credit union member business lending expanded by 45 percent. During that same period, banks, small business lending fell by 15 percent. So it's a pretty dramatic difference.
NNAMDIWhat do you think accounts for this rising popularity?
CHENEYWell, part of it is people are having a harder time getting a loan from a bank. They have a different relationship with the credit union in that they're not just a customer, but they're also an owner. Credit unions stepped forward to sort of fill a void, I think, in many respects in some markets in terms of business lending.
NNAMDIThe biggest issue right now for credit unions seems to be the cap on lending. Can you talk about that?
CHENEYYes. There is a cap that was imposed, unfortunately, in 1998. Prior to 1998, there were no restrictions on credit union business lending. But in 1998, a cap was imposed. It's 12.25 percent of assets, which is a very low percentage. We're trying to raise that cap modestly for credit unions that have experience in business lending and who are close to the cap so that they can do more to help small businesses. And we have legislation pending in Congress now to do just that.
NNAMDIWhat kind of impact do you estimate that raising the cap would have?
CHENEYWe estimate that in the first year, it would free up an additional $13 billion in capital for small businesses. That translate -- if you use the administration's numbers, that translates to 140,000 jobs in the first year. And it's no cost to taxpayers. In other words, all we need is the cap lifted, and credit unions could do more to help small businesses.
NNAMDIRaising this cap is opposed by the big commercial lenders. What piece of the lending do big commercial lenders control right now?
CHENEYWell, banks oppose it for a number of reasons, one of which is they say credit unions weren't meant to do business lending, but credit unions were meant to make loans to their members for whatever purpose. And we've been making business loans for more than 100 years. The cap, we think, unnecessarily restricts lending. Credit unions are careful lenders. They -- they're strong underwriters.
CHENEYCredit union business loans perform better than bank loans. Credit unions are increasingly involved in small business lending. We don't think there's any good policy reason to restrict the lending. You know, banks -- we need strong banks making loans to small businesses, and no one's suggesting that that should stop. We just think credit unions should be able to do more.
NNAMDINot that anybody's noticing, but this is an election year. What are the chances that this bill will pass?
CHENEYWell, it's difficult to get anything done in Washington in an election year, and we acknowledge that. But we have strong bipartisan support in both the House and the Senate. We're working hard every day to convince lawmakers that this is good public policy, and we're hoping we can get around the politics of an election year and get it done as soon as possible.
NNAMDIBill Cheney, he's the CEO of the Credit Union National Association, C-U-N-A, CUNA. Bill Cheney, thank you so much for joining us.
CHENEYThank you for having me. My pleasure.
NNAMDIWe're still talking with Bryant Ruiz Switzky, senior staff reporter with the Washington Business Journal, and Bridget Bean, district director of the Washington Metropolitan District Office of the U.S. Small Business Administration. Bridget Bean, some of those credit union loans are, in fact, SBA-backed loans. Does it work in much the same way as a regular commercial lender?
BEANIt works exactly the same way, and I think that there is a role for all lenders. There is no shortage of need in the small business community for access to capital. So, for me, I'm thrilled that there's as many players coming into the small business lending arena. Credit unions play a critically important part. Our large -- you know, the large national lenders, they play an important role.
BEANThere is absolutely enough need out there to have as many lenders who are committed to helping small businesses 'cause we know small businesses create two out of every three net new jobs. Fifty percent of the American people work -- in the private sector -- work for a small business. It's -- there's no shortage. So I'm thrilled to hear more and more people wanting to get into the area of small business lending.
NNAMDIWe'll talk about the subprime commercial lenders in a second. But first, here's Maddy (sp?) in Washington, D.C. Maddy, you're on the air. Go ahead, please.
MADDYHi. How are you?
MADDYSo I have worked in D.C. for 10 years and sell contracts to different government agencies in the services sector. And I have to say, of the 50 agencies that I've worked with, SBA specifically has been the most difficult agency to work with. So I don't know if this is so much a question or advice. One thing that I think should be noted is that, as a small business, SBA gave us a very difficult time through and through, and most of the problems came specifically from the acquisition department of SBA.
NNAMDIAnd when you say the acquisition department, exactly what were you trying -- what was the nature of the difficulty you had with the acquisition department? For those of our listeners who are unfamiliar with what the acquisition department does, can you talk about that?
MADDYSure. Sure. Well, the acquisition department of every federal agency is the agency that handles the procurement or the buying arm of that agency. So, for my company I was dealing with at the time, we were a small veteran-owned company, and we were told that we were going to win a contract. And this all comes through acquisition. They communicate everything to us. So we were told that we were going to be awarded a contract.
MADDYWe were asked for our people to start. Then we were asked -- our people had to suddenly get dismissed. We had problems with payments thereinafter. We had problems at one point when we decided to go after another competition. We had problems getting feedback as to why we didn't win the competition. We couldn't get a straight answer. And then I was told later from an oversight committee that it went to a large business, not a small business, even though it was set aside for the small business swim lane. So this is just...
NNAMDIWhen was your last experience with SBA?
MADDYSay that again?
NNAMDIWhen was -- when did all of this occur?
MADDYThis occurred in 2010.
NNAMDIOK. Let me ask Bridget Bean if anything has changed since then at SBA that would facilitate somebody like Maddy being able to get business done more quickly and efficiently.
BEANWell, SBA follows exactly the same rules for procurement as every other agency, Maddy. And I'm sorry to hear about your experience. We do actually pride ourselves on -- because we are the Small Business Administration, the majority of our procurements go to small business. It's our mission, and we feel very, very strongly about doing that. I would offer to, you know, sit down and talk with you. It's an unfortunate situation, but SBA is committed to making sure that small businesses get as much work, especially the SBA.
BEANAnd as far as the payment is concerned, the president has just issued an order for what we call Fast Pay, and because, Maddy, you're not alone, payments by federal governments has not been as fast as we would like it to be. And so the president has issued a 15-day mandate that agencies can now pay small businesses on an accelerated fashion, and what we hope that will do is get the money into the hands of small businesses, which we know that they need. So to wait 30, 60, 90 days for an invoice to be paid is unacceptable.
BEANAnd so we do now have this ability for Fast Pay, as we call it, where small businesses can be paid in as little as 15 days, and if you are the contracting officers -- you don't know about this provision at other agencies -- please have them call me directly. And I will share the information with them and make sure that they know how to implement that Fast Pay for you.
NNAMDIMaddy, thank you for your call. Better luck next time. Bryant, the other place people turn, who cannot get funding from regular banks, is subprime commercial lenders. And as credit has tightened, that has increased. Talk about that.
SWITZKYYeah. So there are the -- this whole separate sector of commercial lenders that are not banks. And as being non-banks because they don't accept deposits, they have much less regulation, in many cases, zero regulation and can make loans that, you know, that a bank wouldn't want to make or maybe wouldn't be allowed to make. One example is, say you're -- say you own a restaurant. And restaurants are notoriously challenging for banks to lend. They have a high failure rate, and there are other things that make them hard.
SWITZKYAnd a lot of restaurants wind up turning to something called merchant cash advance. So what this is is this is a place where they will lend -- they focus on merchants that can't get bank loans. And how they do it is through your credit card terminal. So what they do is they -- they'll give you, say, a $30,000 advance, and they say you'll repay that back to us by giving us a percentage of every credit card swipe at your business, and we'll take that percentage until we are repaid the advance and the fee. So it might total, say, $50,000.
SWITZKYAnd because of the way this is structured, because it's an advance, it's not a loan. And therefore, it's not subject to usury laws, you know, caps on how much interest there is. And this type of financing can be brutally expensive. And a lot of -- they're -- you know, we're cascading defaults at some of the merchant cash advance companies as a result of this during the downturn when so many businesses are struggling, but that's an example of a place that a lot of desperate businesses will go.
NNAMDIAnd oftentimes, it's my understanding, the lender gets a personal guarantee. They can sue the business owner. They can take property, house, car if they get a court settlement.
SWITZKYOh, yes, they can. The challenge is that oftentimes, there's not much to get because the people are essentially broke, and bankruptcy is often involved. There's a, you know, a company in Bethesda called Rapid Advance that uses that mode, and they -- I did a report on them a couple of years ago, and during the previous two or three years, they had filed more than 1,400 lawsuits in Montgomery County against small businesses that defaulted and against the owners of those small businesses.
NNAMDII'm afraid we're running out of time. But, Bridget Bean, this brings the final issue to mind, and that is that a lot of small business owners need a lot of help putting together a solid business plan. What does the SBA offer in that regard? If you can, tell me that in about 30 seconds
BEANAbsolutely. SBA also has an important component in our mission, and that is to counsel and train small businesses. So through the SBA our resource partners, which is the SPDC at Howard University, George Mason and University of Maryland, our women's business centers, which are in D.C. and Virginia and Maryland, we will -- we'll sit down with the entrepreneur to look at the business plan, see where they are.
BEANIf you're a new business, it's important to meet with the counselor. If you've been in business for 10 years, it's equally as important because a business should be dynamic. And your business plan should be as dynamic as it was when you first started.
NNAMDIBridget Bean, she is the district director of the Washington metropolitan district office for the U.S. Small Business Administration and the regional director for our five-state area. Thank you for joining us.
NNAMDIBryant Ruiz Switzky is a senior staff reporter with the Washington Business Journal. Bryant, thank you for joining us.
NNAMDIAnd thank you all for listening. I'm Kojo Nnamdi.
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