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Terry Anderson had to reboot his information technology career after he was laid off in September from Wells Fargo Home Mortgage. A programmer and applications analyst, he had worked for the financial services company for 23 years.

Following several weeks of talking to recruiters, he shifted gears and found a franchise business that specializes in providing in-home and office computer technical support. It was a good fit with his technical background, and provided a chance to start his own small business.

“I looked at it and thought, ‘This is me,'” he said. “The problem was, nobody wanted to make a small business loan. (The banks) were more than willing to take my information, but they wanted a lot of equity, and you don’t have that when you’re a start-up business.”

Last month, the Ankeny resident became the first small business owner in Iowa to receive a loan through the U.S. Small Business Administration’s (SBA) new microloan program. Launched in October, the program is designed to provide up to $35,000 for start-up companies with five or fewer employees. Using a $20,000 loan to augment his retirement savings that he put into the business, Anderson hired three part-time service technicians and last week opened Fast-teks On-site Computer Services of Central Iowa.

No fees, more guarantees

Anderson’s situation demonstrates why the SBA has taken steps to increase the availability of SBA-backed loans. Originations of new SBA loans have declined by about 45 percent nationally over the past 12 months as secondary markets for the loans have dried up and fewer businesses are seeking them.

Through funding provided by the American Recovery and Reinvestment Act signed by President Barack Obama in February, the SBA has temporarily eliminated fees on its 7(a) and 504 Loan programs, and boosted the guarantee it provides banks from 75 percent to 90 percent of the loan amounts. Additionally, the U.S. Treasury Department has committed up to $15 billion to purchase these loans to help unlock the secondary market for these loans, and has issued new reporting requirements to better track small business lending by banks.

The act also pumps an additional $50 million into the SBA microloan program that Anderson used.

The initiatives should encourage more small businesses to borrow, while providing banks with a greater comfort level in making those loans, said Joe Folsom, director of the SBA’s Des Moines office.

“What we’re doing is mitigating the risk of the lender; we’re enhancing the tools that lenders can provide to their customers,” he said.

A component of the Recovery Act that is generating the greatest interest among small businesses, Folsom said, is the America’s Recovery Capital (ARC) Stabilization Loan program. Through that new program, for which rules are now being developed, many small businesses in Iowa will soon be able to borrow up to $35,000 of 100 percent SBA-guaranteed funds to use to help them make payments on existing, non-SBA loans for up to six months.

“This new program is intended to give small businesses some temporary financial relief, keep their doors open and get their cash flow back on track so they can maintain existing jobs and ultimately create new jobs,” Folsom said.

Excellent response

The microloan program that Anderson used is another resource for start-up businesses. The Iowa Foundation for Microenterprise and Community Vitality (IFMCV), the nonprofit organization that operates that program in Iowa, is now processing about a dozen more applications following that initial loan, said Craig Downs, the IFMCV’s loan administrator. The program’s goal is to partner with other nonprofits and community foundations across the state to offer gap financing to small businesses that don’t qualify for conventional bank loans.

“We’re getting some excellent response,” Downs said. “I’ve had contacts from 200 potential applicants, and some of them are working on applications at this point.”

The program, which is still working on securing nonprofit partners, initially has $750,000 available to loan, with a total commitment from the SBA for $3.5 million in Iowa. “We’re also in discussions with other governmental agencies with amounts to loan,” he said.

Ryan Bomer, a loan officer with Iowa State Bank in Des Moines, said the SBA has done a good job of informing banks about its new initiatives. The challenge now, he said, is to get the word out to small businesses. Several informational events, such as one planned by the South Des Moines Chamber of Commerce and a joint event planned by several other Greater Des Moines chambers, should assist in that effort, he said.

“As far as the individual programs themselves, the main benefit I think will be in the 504 program (which provides loans to existing businesses for expansion),” Bomer said. “Those are much larger loans (than the 7(a) program designed for start-ups), so the benefit from the waiver of the fees is going to be much more significant.”

Iowa State Bank has already made three of the new no-fee loans with the higher guarantees, Bomer said. Two of those borrowers were charged fees but have already received refunds from the SBA, he said, while the third was not charged fees.

Despite the dropoff nationally, applications for SBA-guaranteed loans at Iowa State Bank have remained “pretty consistent,” he said. What has been lacking is the ability of applicants to bring equity to the table, he said. “A lot of people are wanting 100 percent financing, and that’s not possible.”

Not enough?

Clive-based First American Bank, another active SBA lender, has also obtained “very good” information regarding the programs, said Doug Bass, First American’s president. The bank received a couple of months’ advance notice of the programs, allowing it to alert customers they would be coming.

However, “I’m not sure (eliminating fees and raising guarantees) will make too much difference,” Bass said. Early on, the SBA had considered raising the loan limit from the current $1.5 million, which he believes would have been more effective. “If they would re-think the loan size and industries, I think that would have more impact,” he said. “Certainly the measures that have been enacted have some positives, but I think there is more that can be done that would produce greater results.”

Few Iowa businesses are currently seeking SBA-backed loans for expansion, said Greg Sweet, vice president of Iowa Business Growth Co. in Johnston. A certified development corporation, Iowa Business Growth participates in the 504 Loan program with the SBA. Iowa Business Growth participated in eight loans totaling about $1.5 million in the four months ending Jan. 31.

“I don’t share the belief that slow SBA loan growth is due to banks (being) unwilling to loan money,” he said. “What I see from my point of view is that there aren’t a lot of people out there seeking money right now. There may be people seeking to cover their shortfall in cash flow; there may be a lot of that going on.”

Because the prime rate is so low right now (3.25 percent), the maximum rate that banks can charge for 7(a) loans with terms longer than seven years is just 6 percent, Sweet said. “I’m not sure that 6 percent provides the margin for a lender to make it right now,” he said.

Additionally, the 90 percent guarantee may make it more likely for banks to help their existing customers, he said, “but maybe not enough to take on new customers. The margin just isn’t there.”

Renewed confidence will have to precede more borrowing, Sweet said.

“There has to be a confidence that there won’t be such (economic) changes that their decision to expand won’t be a good one,” he said. “Until that uneasiness goes away, they’re not going to be eager to take on a lot of new debt.”

Anderson, who will operate his computer services business from his home in Ankeny, said that without the microloan, he would have had to buy a smaller franchise territory in Greater Des Moines that would have made his business less viable. To bootstrap the business, he rolled over his 401(k) retirement account through a specialized transaction that enabled him to invest the funds in his own company. He also just received a $500 grant from the Iowa Department of Economic Development. The state agency is providing the incentive to start-ups using the microloan program that agree to participate in training or networking activities.

“I think everything has fallen into place,” Anderson said. “The length of time it takes to get a loan can be frustrating, but not getting the loan can be even more frustrating.”