Small business loans get big lift

Another sign of a nascent recovery

Elin Agustsson held up one of her signature cupcakes in her new Busy Bee Bakery in Melrose. A loan from East Boston Savings Bank helped Agustsson open the bakery. Elin Agustsson held up one of her signature cupcakes in her new Busy Bee Bakery in Melrose. A loan from East Boston Savings Bank helped Agustsson open the bakery. (John Tlumacki/Globe Staff)
By Robert Gavin
Globe Staff / June 12, 2010

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Massachusetts small businesses, seeing prospects improving, are borrowing more money through government loan programs to expand, hire, and start ventures, providing another sign that the state’s economic recovery is gaining traction.

Borrowing through the US Small Business Administration’s primary guaranteed loan program has more than doubled in Massachusetts over the past year, and is on track to match levels not seen since 2005. The loan activity in Massachusetts is also among the most robust in the nation: Only eight other states have had more activity over the past several months, according to the agency.

“SBA activity is a barometer of the economy, and small businesses’ access to capital,’’ said Bob Nelson, director of the agency’s Massachusetts office. “We’re seeing more optimism, more choices for businesses to get capital, and more competitiveness among lenders. There’s certainly a lot more work to be done, but we’re seeing some positives.’’

Credit has been a critical issue for state and national economies, and particularly for small businesses, a major generator of new jobs. In the wake of the financial crisis and deep recession, many banks became reluctant to lend, preferring to hold onto capital they might need to offset bad loans and weather the downturn. Many businesses, in turn, were reluctant to borrow and add debt when the economy was sliding.

“The problem has not been a lack of credit, but a lack of sales and economic activity to support that credit,’’ said Bill Vernon, Massachusetts director of the National Federation of Independent Business, a small business advocacy group. “Now, I think, we’re heading in the right direction. It’s bumpy and inconsistent, but there are more companies doing better than they were a year ago.’’

As the outlook has improved, so has SBA lending. From October through the end of March, the first six months of the federal fiscal year, Massachusetts lenders made 923 SBA loans totaling $142.3 million, compared with 443 loans worth $61.8 million during the same period in fiscal 2009.

SBA loans — commercial loans from banks that are mostly guaranteed by the US government — represent only a small slice of small business lending. In March, Massachusetts banks had more than $9 billion of small business loans on their books, down slightly from nine months earlier, according to the Federal Reserve Bank of Boston. Still, the rebound in SBA lending suggests a change in conditions. As recently as last fall, some Massachusetts businesses were complaining that they couldn’t even get SBA loans through local banks.

In addition to the surge in SBA lending, the number of lenders making such loans has also jumped in recent months, to about 120 from fewer than 90 in the same period last year.

Among the new lenders is East Boston Savings Bank, which has made nearly $2 million in SBA loans since October, according to the agency. One of those loans was for up to $300,000, and went to Elin Agustsson. Two weeks ago, she opened the Busy Bee Bakery near a Melrose commuter rail station, and created 10 new jobs — three full-time and seven part-time. Agustsson, 51, said she had dreamed for years of starting her own bakery, and decided the time was right, despite a still shaky economy.

“Even in a recession, people still need to eat,’’ Agustsson said. “The Obama administration is pushing banks to lend, and banks are looking for people, people they can count on.’’

A number of factors have contributed to East Boston Savings’s move into the small business market, including federal stimulus legislation that increased SBA guarantees to up to 90 percent for most loans, from 75 percent, said Richard Gavegnano, East Boston Savings’s chief executive. Another factor, he said, was the struggle of large national banks hurt in the subprime mortgage meltdown and financial crisis. The bank, with 19 branches in Suffolk County and on the North Shore, has added an executive who focuses specifically on SBA lending.

“With the message clear that government wants to facilitate small business lending, and the megabanks pulling back, we felt there was an opportunity,’’ Gavegnano said. “We want to participate in small business activity, and we’ve ramped up considerably.’’

Small business, which traditionally has been underserved by lenders who preferred to make larger, more profitable loans, is increasingly viewed as a growth market, local bankers said. As a result, the increase in SBA guarantees has provided incentives for some banks to break into small business lending, and for longtime participants in SBA programs to expand their lending.

For example, First Trade Union Bank of Boston, founded by the Massachusetts Carpenters Combined Pension and Annuity Funds, traditionally focused its lending on commercial real estate, bank officials said. It turned toward SBA lending last year as way to further diversify its loan portfolio, bank officials said, and has made more than $6 million in small business loans since October, according to SBA data.

Eastern Bank, the state’s top SBA lender, increased its lending eightfold over the past year, writing more than 170 loans valued at $8.5 million between October and March, according to SBA data. “The fact that we have SBA behind these loans allows us to be more confident and get credit into the hands of small businesses,’’ said Joe Riley, the Boston bank’s executive vice president of retail and business banking.

In many ways, the reliance on the SBA guarantees shows that the economy, credit, and confidence are not back to normal after the historic downturn of the past two years. Still, bankers said, the increased lending demonstrates that conditions are improving. Earlier this week, a Federal Reserve survey found that many New England businesses across several sectors were reporting solid sales and customer demand.

Such companies include Cercone Brown & Co., a Boston public relations and advertising firm. The nine-year-old company, which employs 22, recently received a $250,000 SBA loan through Eastern Bank to help it expand into a new office and nearly double its space. The company has also added two employees and expects to hire more in the coming months.

“When you get more business, you have to move into a bigger office. You need people. You need to invest in new programs,’’ said Len Cercone, a founding partner. “Small businesses are entrepreneurial, and when you add a little capital, you can turn that entrepreneurial spark into a fire.’’

Robert Gavin can be reached at