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Banks see surge of bad loans from small businesses
05/13/2008 - By ROBIN SIDEL and DAVID ENRICH, The Wall Street Journal
The Wall Street Journal - Latest Groans: Small-Business Loans
Latest Groans: Small-Business Loans
Feeling the Sting of Missed Payments and Losses,
Lenders Move to Tighten Credit StandardsThe turbulent economy is exposing yet another type of credit where
bankers let their guard down: small-business loans.
Missed payments and losses on small-business loans are surging at
banks throughout the country that were so eager to pad their profits
that they essentially threw typical underwriting methods out the
window. Some lenders doled out small-business loans as if they were
credit cards, relying solely on the personal credit scores of borrowers.
That meant many loans were made without assessing a company's
strategy or finances, even by banks that avoided
subprime mortgages. Now the economic slowdown is
leaving lenders with little or nothing to collect on many small-business
loans in case of default.
Vexed in Vineland
The mistakes already are haunting lenders from Bank of America
Corp. to Sun Bancorp, a Vineland, N.J., bank with 70 branches. The
problems are expected to spread as business failures mount. Tighter
lending standards as banks try to reduce their risk are making life
tougher for small-business owners. "We wanted to give them access to capital faster,"says Thomas Geisel, Sun's chief executive. "At that point in time, the economy could support it." Rising charge-offs, including most of the $1.2 million hit Sun took on bad loans in the first quarter, prompted the bank to revert to its traditional underwriting practices. Borrowers now are required to put up collateral and wait several weeks before finding out if they were approved. Under the loosened loan terms, small-business borrowers could walk into any Sun branch,
fill out an "express" one-page application and get as much as $100,000
in 24 hours.
At Bank of America, the largest U.S. bank in stock-market value,
about 20% of the $3.3 billion set aside for soured loans in the latest
quarter was earmarked for the Charlotte, N.C., bank's small-business
loans.
While bank officials won't be specific, much of the damage appears
tied to the "Business Credit Express" program that Bank of America
launched in 2006. It courted small businesses with an aggressive new
program that promised big loans with little hassle.
Among the selling points: entrepreneurs could borrow as much as
$100,000 through an unsecured credit line even if they had been in
business for just one day.
Enticements Offered
At the time, Bank of America held about 22% of bank deposits by
U.S. small businesses but only an 8% market share of loans to that
group, according to the bank. So bank executives began wooing
holders of Bank of America small-business credit cards, encouraging
them to seek credit lines and other types of loans.
Entrepreneurs also were enticed with free online payroll services and
easier access to health insurance.
Under the new loan program, borrowers seeking less than $50,000 didn't have to provide financial documentation -- the equivalent of "no doc" mortgages that have burned many residential real-estate lenders.
By early 2007, Bank of America's small-business loan portfolio was up 30% from a year earlier to $14 billion.
It wasn't long before delinquencies began piling up. "Candidly, we have seen much higher losses than we would like," Joe Price, Bank of America's chief financial officer, said at an investor meeting in November.
In response, the bank had started to lower lending limits and increase the amount of time that a company had to be in business to get a loan, he added.
On April 1, Bank of America discontinued the Business Credit Express program and began steering customers to other small-business products, such as credit cards and other lines of credit.
A company spokeswoman says Bank of America remains committed to small-business customers and is focused on "mature, established businesses with good personal credit history."
National City Corp. says it isn't tightening underwriting standards for small-business loans despite the Cleveland bank's acknowledgment last month that its small-business loan portfolio in Florida "is showing some early signs of stress."
Overall, a survey released this month by the Federal Reserve found that about half of U.S. banks are tightening their standards on loans to small firms, compared with about 30% that reported doing so earlier this year. And nearly two-thirds have raised the rates they're charging on those loans.
"A lot of the banks, especially the larger ones, are really cutting back," says Christine Barry, research director at Aite Group, a financial-services consulting firm. "It's absolutely harder for small businesses to get credit today."
Money 'Less Available'
"Money is simply less available," Lawrie Hollingsworth, chief executive of Asset Recovery Technologies Inc., an eight-employee company in Elk Grove Village, Ill., told a House subcommittee last month. "When it is available, it is at a new premium and cost for less money and more restrictive lending covenants."
She blames her company's 50% sales decline last year partly on higher interest rates and trouble getting loans for the small businesses that hire her company for disaster-relief services.
Vanessa Baugh says her lender reined in the home-equity credit line that she has used to finance growth of her jewelry store in Lakewood Ranch, Fla.
As a result, "it would be out of the question for me to expand right now," she says.
Write to Robin Sidel at robin.sidel@wsj.com and David Enrich at david.enrich@wsj.com
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