Del. SBA office sets record for federally backed loans

Parthiban Jayaraman has opened seven Dunkin’ Donuts franchises in New Castle County and a Greene Turtle restaurant in Dover in a little more than 10 years.

Even with that track record, Jayaraman says he and business partner Pradip Saha would have found it difficult to secure a traditional bank loan to finance a second Greene Turtle location slated to open in New Castle County later this year.

“Banks look at restaurants as an unstable market so they want you to have 100 percent of the collateral upfront,” he said. “If we had to use a conventional loan, we absolutely could not have financed this project or any of our other businesses.”

Instead, Jayaraman and Saha were able to secure $2.8 million in financing through a bank loan backed by the U.S. Small Business Administration.

Their company is one of 180 businesses to receive a private loan backed by the SBA’s Delaware District Office as of Aug. 1. That’s a single-year record for the office – surpassing last year’s mark of 119 loans – with a full two months left to go before the end of the federal fiscal year.

The local SBA office also will set a record this year for the dollar amount of notes authorized with the full faith and credit of the U.S. government.

As of July 31, the office had awarded federal guarantees on loans totaling just shy of $101.2 million – nearly three times the volume approved in 2014 and close to seven times the amount in 2010.

“The increase we’re seeing this year is a result of the fact that we’re starting to see the economy improve, this year in particular,” said John Fleming, who heads the SBA’s district office in Delaware.

“People are getting back on their feet and looking to start a new business or expand the one they already have,” he said. “There’s been enough growth so far that lenders are getting more aggressive when it comes to small business and these federal guarantees are a great tool for providing that financing.”

The loans approved by the SBA district office this year fall under two categories.

Like, Jayaraman’s loan, about 175 were authorized under the 7(a) loan guarantee program – aimed at providing capital to purchase equipment and improve property. The average 7(a) loan guaranteed in Delaware this year is worth about $546,000.

Another five loans were approved under the 504 Fixed Asset Financing Program, which targets owner-occupied real estate.

Those loans – averaging nearly $1.3 million – all have been extended by the Delaware Community Development Corp., a nonprofit group that works with banks to help small businesses secure financing.

Under the programs, the SBA does not extend actual loans to borrowers. Instead, the agency provides federal guarantees to lenders on behalf of small businesses.

Typically, those guarantees mean 50 to 90 percent of the loan will be covered by the federal government if the borrower ends up in delinquency.

That backing helps convince banks and other lenders to work with borrowers who otherwise may not be able to get financing – usually because of insufficient collateral.

“The SBA guarantee doesn’t make a bad loan good,” said Jimmy Jarrell, the vice president of SBA lending at TD Bank, which extended Jayaraman’s loan.

“But it does help to make a good loan better, especially if it’s right on the edge and needs a little help to cross the goal line,” he said.

Only about 4 percent of the total dollars guaranteed by the SBA district office end up in default, according to Fleming.

The program, he said, is fully financed by the fees paid by borrowers and lenders, meaning no taxpayer money is used to cover loan losses.

“When someone defaults, it’s not like a bank calls Uncle Sam and says, ‘Where’s my check?’ ” Jarrell said. “It’s a lot more complicated than that, and we have do everything we can to work out a payment plan with borrowers first.”

So far this year, TD Bank has approved 14 SBA-backed loans in Delaware, totaling more than $11 million – fourth in volume behind Live Oak Bank, Newtek Small Business Finance and First Financial.

In terms of individual loans, M&T Bank leads the way with 47, followed by WSFS with 26 and Wells Fargo at 16.

Most of those loans have been extended to cover capital expenses, provide credit lines and cover startup costs for entrepreneurs and franchisees, Fleming said.

But about $26 million of the loans backed by the local SBA this year were extended to poultry farmers looking to finance the construction of new chicken houses.

That doesn’t come as a surprise to Bill Satterfield, executive director of the trade group Delmarva Poultry Industry Inc.

“We had some pretty high soybean and corn prices over the last couple of years that kept profits pretty flat for the big chicken companies,” he said. “Now, those prices have come down and demand is up, so your Perdues, Mountaires and Tysons are offering incentives to farmers to increase their production.”

Satterfield said volatility in the market can make it difficult for farmers to secure traditional bank loans for improvements like chicken houses, which can run in excess of $400,000.

“That’s why most lenders around here rely on USDA-backed loans,” he said. “But my understanding is Live Oak Bank and some others are now using the SBA loans because it’s a less cumbersome process.”

Delaware isn’t the only state seeing a jump in SBA-backed loans. Demand for the 7(a) program has increased dramatically nationwide in recent years, particularly since Congress raised the maximum loan amount from $2 million to $5 million in 2010.

The SBA was forced to temporarily halt the program last month after reaching this year’s $18.75 billion limit for loan guarantees – a pot shared by all the agency’s district offices.

President Barack Obama signed a bill July 28 that raised that lending limit to $23.5 billion.

Jayaraman said that action will help entrepreneurs throughout the county launch their businesses and create much needed jobs.

“Our Greene Turtle restaurant in Dover employs 100 people and the new location will hire about 80,” he said. “None of those jobs would exist without these SBA loans because it’s just too difficult to get started when all the money has to come out of your pocket.”

Contact Scott Goss at (302) 324-2281, sgoss@delawareonline.com or on Twitter @ScottGossDel.