Eric Greedey makes a smoothie with the help of a s.
(photo credit: AP)
As the effects of the economic collapse began
pouring down Main Street, the US government last year was left holding
a record $2.1 billion in write-offs of small-business loans it had
guaranteed. Officials expect the number of defaults to rise as the
nation continues to climb out of the recession.
Records obtained under the federal Freedom of
Information Act show the public is paying to offset bank losses on
small-business loans across the country, from a convenience store in
the tiny Canadian border town of Houlton, Maine, to a graphic-arts
design company on the island of Hawaii, more than 8,000 kilometers
Despite having loans written off, little companies such as
Caffe Sportivo - an espresso shop and small gym in Redwood
- are barely scraping by.
"I just couldn't make any payments. I was barely making rent or
payroll," owner Chris Sakelarios said on a recent afternoon when her
cafe stood empty except for two patrons who read as they sipped coffee.
"The same as everyone else. We're in a hovering pattern."
It's a sign that even as record profits reemerge on
Wall Street, thanks to massive government loans and guarantees for
banks deemed too big to fail, the pain on Main Street is as profound as
it's been in half a century. The companies that were not too big to
fail are failing.
Their plight is a shift from previous recessions when small
business bounced back ahead of big employers, said Todd McCracken,
president of the lobby group National Small Business Association.
"This could be the first economic recovery we've seen in a long time that hits small business the hardest the longest," he said.
The Small Business Administration purchased $2.1b. in bad loans
from lenders last year. Agency officials say it's likely that this year
will see another high as the recession nears two years.
"It's frustrating when [banks] are getting bailed out for bad
decisions they made, that there isn't more assistance for the small
business," said Eric Geedey, who manages Caffe Sportivo for Sakelarios.
Sakelarios obtained a $20,000 SBA loan from Union Bank in late
2007 to start her business when the economic outlook was more positive
on the affluent San Francisco Peninsula. Within a year, however, she
was scraping by with the help of a landlord and vendors who let her
adjust payments. She has reduced the hours of her seven employees and
relies on her brother and a friend to help keep the doors open on
weekends. The balance of the loan was written off in early January.
In addition to being dogged by bad credit, the cafe will have to report the loan charge-off as taxable income, Geedey said.
Sakelarios isn't the only recession victim and she won't be the last.
SBA loan defaults generally occur in two stages. The first is
when the bank decides it won't get its money back and asks the
government for the guaranteed portion of the loan. In the second, the
government decides it won't receive any more collateral or money from
Years can elapse between the time that the borrower stops paying and the government writes off the loan.
In 2008, for example, the government concluded it wouldn't be
able to recover $1.3b. in defaulted bank loans it had guaranteed. Many
loans were part of a backlog, according to SBA officials.
But an AP analysis found that the time between loan approvals and loan defaults is narrowing. According to the analysis:
• More than $235 million in restaurant loans have been charged
off since 2007. The 2,586 restaurant charge-offs make up the largest
number of defaulted loans, according to the SBA. More than 150 loans
made to Quiznos franchises - worth nearly $15.5m. - have been written
off since 2007.
• The Gulf Coast fishing industry, battered by two major
hurricanes in 2005, has been hit especially hard. Half of the 10 cities
with the highest industry-specific write-offs are in Biloxi,
Mississippi; New Orleans; Ocean Springs, Mississippi; Lafayette,
Louisiana; and Abbeville, Louisiana. All told, the shellfish fishing
industry had 45 loans charged off, at a total cost of $19.5m.
• The banks making the loans have also been hit hard by the
recession. Bank of America Corp., which has received $52.5b. in
government aid, has had nearly 7,000 loans worth $238m. charged off
since 2007. More than 660 loans worth $174m. have been charged off by
CIT Group Inc., a major commercial lender forced to turn to bondholders
in an effort to try to avoid bankruptcy protection after the government
refused to save the company.
JPMorgan Chase & Co., which repaid $25b. in taxpayer loans last month, has written off nearly 2,300 loans worth $117m.
"I have never seen it as rough as it is right now," said Scott
Hauge, president of Small Business California, a business advocacy
Small businesses account for half of all private-sector workers
and have created roughly half of America's jobs over the past decade.
They received some help from the $787b. federal stimulus package in
February, including higher micro-lending amounts and federal loan
guarantees. Congress also authorized the US Treasury to purchase $15b.
in pooled loans to encourage lenders to provide money to small
companies. The SBA recently announced it will guarantee short-term bank
loans to help small businesses pay off existing bills.
The White House has floated a proposal to take money from a
$700b. bailout of the financial system and provide small companies with
working capital, allowing them to add inventory and employees. If it
happens, the White House said, help might arrive by fall.
That's too late for thousands of defunct companies with shuttered windows, disconnected phones and broken dreams.
Diego Garcia's soccer supply store in the modest northern
California city of Richmond has shrunk to one small location after he
was forced to close his two larger stores last year. Garcia started the
business after launching a youth program and soccer league in
gang-ridden Richmond. He had turned away from his own gang lifestyle
after being shot in the chest at age 18.
Garcia expanded fast, never imagining how quickly
his booming business would decline. When he couldn't pay up, his bank
wrote off nearly all of his $45,000 loan. He lost rental property to
foreclosure at the same time.
"It's too much of a loss," Garcia said. "We had to get loans to get bigger. Then everything went the opposite way."
Eric Zarnikow, SBA's associate administrator for capital access,
said the bad numbers probably will continue to rise as the agency
receives charged-off loans in the future from defaults occurring now.
Sakelarios, a breast-cancer survivor without health insurance, tries to stay optimistic.
"Anytime anyone asks me how it's going," she said, "I say the same thing: 'It's going really good.'"
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