Dr. David Westerberg had the chance to buy into a cosmetic dentistry practice in Palm Desert but found that the credit crunch had chipped away his ability to find money through conventional small-business loans or by tapping his home equity.

Although his house value had gone up, the appraiser was having a tough time finding comparable houses that also had become more valuable.
“The market has changed,” said Westerberg, who already burnishes smiles at a San Bernardino practice. “I found that [bankers] weren’t as willing to lend and it had become much more stringent.”

So Westerberg joined the growing crowd turning to the Small Business Administration for borrowing muscle. As tightening credit rules shut more small-business borrowers out of home equity loans or conventional bank credit, many are seeking loans backed by the SBA.

“We have seen a huge influx of transactions” in the last 30 days, said Roberto Barragan, president of the Valley Economic Development Corp., which connects borrowers with banks authorized to make SBA-guaranteed loans.

Access to capital is crucial for small-business owners like Westerberg, who landed an SBA-backed loan a few weeks ago from Comerica Bank.

These loans, which are issued by banks that team with the SBA, are typically more expensive for borrowers. But they are easier to get than conventional loans because they don’t require the same level of credit scores or collateral, an asset such as equity in a house that is pledged to a lender. They also often offer a longer time period in which to pay back the loan.

That’s good news for small-business owners struggling to find funds. Many have been stymied by the loss of borrowing power inflicted by falling housing prices and rising mortgage interest rates.

Banker Tim Weaver, who runs the SBA loan guarantee program at California Oaks Savings Bank in Simi Valley, has seen a jump in demand for SBA-backed loans at his community bank as the turmoil in the mortgage markets has spread beyond sub-prime borrowers with shaky credit.

“We are getting the reverse effect of the sub-prime market,” he said.

New business owner Gunther Donoso recently turned to the SBA when other options lost their appeal. He was approved for a $35,000 SBA micro-loan through the Valley Economic Development Corp. to open Brownstone Pizzeria in Eagle Rock.

He and his wife, Bertha, had already tapped their home equity twice this year to obtain about $80,000 to start the Colorado Boulevard venture, which will serve New York-style pizza by the slice.

As is often the case for start-ups, the owners eventually realized they would need more money to get the doors open. But tighter standards implemented since they obtained their first home equity loan in January made it tougher to get additional cash out of their house. And Donoso’s debt-to-income ratio probably wouldn’t attract too many conventional small-business lenders, he said.

“A regular small-business loan would have been tough to get, especially since I am up to my nose in debt,” Donoso said.

Melissa Patchett wished she had gone to the SBA first to find funds for her Mas Boutique, instead of trying to work with a loan broker.

She and her business partner, Shannon Benedetti, eventually landed a $7,500 SBA micro-loan. The money will make it possible for them to open their contemporary clothing store on Sunset Boulevard next week.

“I should have gone there the first day,” said Patchett, who is working on getting another SBA loan.

Many small-business owners are looking for funds and, according to a survey released this week by Discover Business Card, the prospect of tighter credit doesn’t bode well.

About 76% of owners in the August poll said that if obtaining credit became more difficult, it would hurt their business.

Until recently, capital was easy to come by for many small-business operators, even those with less-than-stellar credit. If they didn’t qualify for a conventional bank loan, they could tap the equity in their homes, whose values were rising.

Source:

http://www.latimes.com/business/la-fi-smallbiz30aug30,1,3242360.story?ctrack=1&cset=true