WINSTON-SALEM -- State officials are pushing small-business loans as the best growth market for banks, urging them to shift their lending from real estate to dry cleaning establishments, delicatessens and auto body shops.
"Over the next two or three years, this is probably the best kind of loan a community bank can make," said Paul Stock, executive vice president of the N.C. Bankers Association, whose members are primarily community banks.
Gov. Bev Perdue on Friday introduced a program to lean on state banks to tap into Small Business Administration loans. Perdue said the state will aggressively try to boost its share of the federally backed loans and make it easier for banks to hand them out to qualified borrowers.
Kel Landis, former CEO of RBC Centura Bank, is helping lead Perdue's effort. Banks, he said, should be returning to the kind of lending they did before the real estate boom of the past decade.
"They need more of a new focus on commercial and business lending instead of commercial real estate lending," Landis said.
Perdue's program is aimed at helping small businesses grow and creating jobs, but small-business lending also helps banks in the aftermath of the real estate market collapse, said state Commissioner of Banks Joseph Smith.
"Banks need a new source of income" now that commercial real estate and development lending has shriveled, Smith said. "It's crucial to banking. This isn't just a do-gooder policy."
Banks already are offering more small-business loans, at least in the category of loans smaller than $1 million. Banks headquartered in North Carolina doled out $74 million worth of those loans in 2009, compared to $69 million in 2008, an 8 percent increase, according to Chris Gill, banking and professional services group director at SNL Financial in Charlotte.
Perdue announced the new program standing in front of a rack of Reese's Cups at Kings Downtown Market in Winston-Salem, the recipient of a federally backed loan three years ago.
"This business came about with the help of the SBA," said Keith King, the store's owner, who borrowed $30,000 and is contemplating a second location. "We came a long way. It took a lot of work."
The Small Business Administration, though, has received its share of criticism. Its own inspector general said in December that a reported 12 percent default rate on small loans was an unreliable figure because the agency doesn't verify such data.
State officials said that, while more money was going out in federally backed loans in North Carolina, the number of banks providing them has declined.
The three biggest obstacles for the banks have been that small-business loans are riskier than real estate, they require more work and they come with more regulation and paperwork.
The Small Business Administration helped reduce the risk by raising the amount that's guaranteed by Washington from 75 percent of the loan to 90 percent. If a borrower defaults, the bank is only on the hook for 10 percent.
Lending 'boot camp'
Perdue is aiming to reduce the work for banks by taking existing state programs and experts and gathering them into a system for coaching borrowers on how to apply for loans. They will get help crafting a business or cash flow plan, the sort of measuring sticks that banks use.
"A lot of business owners don't know what's involved in applying," said Eileen Joyce, a Charlotte-based marketing manager for the Small Business Administration.
Perdue described the process as "harder than your federal income tax form" and called the new program a "boot camp" on how to apply for a loan.
Wes Sturges, CEO of the Bank of Commerce in Charlotte, said such a program could reduce his loan officers' workload.
"We spend a lot of time helping [loan applicants] write their business plan," he said.
The clincher will be if the Small Business Administration does as federal officials have been discussing and eases some of the requirements on the loans, Sturges said: "That's where our growth is going to come from."
Mike Carlton, CEO of Cary-based Crescent State Bank, praised Perdue's initiative but said the larger problem is that businesses see little optimism in the marketplace. "Until they see the economic climate getting better, most prudent businesses are taking a sit-back-and-wait-and-see approach," Carlton said. "If the government wants to create spending by small businesses, then they need to offer incentives directly to small businesses in the form of tax credits or other considerations." Staff writer David Ranii contributed to this report.
