Stabilizing After the Storm: Small-business loans edge downward in period after COVID

Justine Postorino has known since she was 18 years old that she wanted to own a business – a Rita’s Italian Ice franchise, which was where she worked in her first job. What she didn’t know was how to fund her dream.

In May, Postorino finalized a U.S. Small Business Administration loan through OMB Bank, for an undisclosed amount, that helped with about 85% of her startup costs. She said the loan went toward working capital for equipment for making Italian ice and custard and the infill at 2100 W. Republic Road, Unit 112, in Magers Crossing. She opened the doors of Rita’s Italian Ice in August.

“For a starter, like me, I knew getting a loan was going to be a challenge,” Postorino said. “I’m not an overly wealthy person by any means. I’ve been a person who worked two jobs just to save up to make this dream a reality. I had talked to several banks and I was doing my research, and I realized that if I wanted to make this happen, the SBA loan was going to probably be my best option versus a conventional loan.”

Postorino finalized her loan in 2023, and she may be part of a comeback of sorts for SBA loan volume. According to Southwest Missouri SBA branch data, the number of loans issued was down 14% last year in the 28-county area compared with 2021 volume. Federal officials say the change was expected.

Loan trends
On Springfield Business Journal’s list of the Area’s Largest SBA Lenders, published Sept. 4, the majority of lenders had a decrease in numbers between 2021 and 2022.

OakStar Bank, which has ranked No. 1 locally in SBA loans since 2019, was down 15 loans to 62 in 2022 from 79 loans in 2021, with a 46% drop in the loan amount issued. OakStar is joined by more than half of the banks on the list reporting fewer SBA loans. The top 13 banks combined issued 202 loans valued at $81 million in 2022, down from 250 loans at a value of $130 million the year prior, representing a 38% dip in the amount loaned.

Ram Basnet, deputy district director of the Kansas City SBA district office, characterized the decreases as stabilization following the COVID-19 pandemic, when there was a rise in SBA loans.

“COVID brought a lot of uncertainty,” he said. “Lending in an uncertain environment carries additional risk. There were a lot of COVID relief programs that were still in effect in fiscal year 2021, that were in effect from Oct. 1, 2020, through Sept. 30, 2021.”

SBA enacted several temporary changes to the 7(a) loan program to help borrowers and lenders, Basnet said. A higher guarantee percentage was among them.

Basnet said the guarantee standard for the 7(a) loan increased to 90% from 75%, and there weren’t any fees imposed on 7(a) loans during that time. Some borrowers even received six months of payments on SBA loans until the appropriated funds were exhausted, he said.

The result was a steady uptick in SBA loan demand. Basnet said before the pandemic in 2019, the Springfield office –  which covers 28 southwest Missouri counties  – issued 246 loans through the 7(a) program totaling $96 million. Volume increased to peak at 313 loans with a value of $166 million in 2021. The stabilization began in 2022, with 268 loans totaling $120 million, he said.

SBA loan increases
Although just over half the banks on SBJ’s list of the Area’s Largest SBA Lenders recorded a decrease in numbers, a few banks had a minimal increase.

At OMB, the volume of SBA loans granted was up last year, but the cumulative dollar amount of those loans was down. In 2021, OMB ranked No. 13 with only two SBA loans, which totaled nearly $5.2 million. In 2022, OMB ranked No. 8, with six loans totaling nearly $4.1 million.

Joey Orr, executive vice president and community banking president at OMB, attributes more loans to just the bank’s overall growth. OMB made SBJ’s fast-growth list of the Dynamic Dozen companies in 2023, with a revenue growth rate of 63% over the last three years.

“Loans have just been a bigger focus for us,” he said. “We’ve dedicated a department to it. Looking forward, with higher interest rates, we kind of expect things to slow down. So, we’re always looking for other avenues that we can engage ourselves in. SBA loans are one of those that we can continue.”

Orr said it’s been about letting the public know the bank can offer opportunites for business owners.

“We’ve probably done a better job of getting ourselves out there and letting entrepreneurs know that we’re a player in the SBA world,” he said.

Orr said having the SBA serve as a guarantor on the loans gives banks more confidence to loan to entrepreneurs.

Entrepreneurship running strong
Orr said even with the current economic lending climate with a federal prime rate of 8.5%, and the changes bankers are facing, prospective business owners are not going to give up on their startups.

“Entrepreneurs are not going to quit just because interest rates go up,” he said. “We still are going to continue to do business.”

After Postorino made the decision in 2019 to open Rita’s, a place that for her was a childhood memory from growing up in New Jersey, she faced a pause like many other business owners during the pandemic. Prior to the arrival of COVID-19, she already had spoken with lenders and had financial projections lined out.

But during COVID and in its aftermath, she had to worry about inflation and lack of being able to find materials for a reasonable cost. Plus, her planned location changed a couple of times.

“I actually wasn’t really sure if the loan or if my project was ever going to take off,” she said. “COVID-19 definitely played a huge challenge in the inflation. I probably redid my budget multiple times, just to make sense of things and had to adjust how I was going to do my infill. But it all ended up working out. I couldn’t be more grateful for that.”

She said connection with OMB and the SBA helped her business take flight.

“That’s why I chose an SBA loan, after kind of doing my research and seeing what avenues and options I had,” she said. “It made the most sense. It felt like it was the most beneficial to me, in order to really make my dream happen the way I wanted it to.”