Citizens Bank is proud of the achievement: For several years now, it’s been
Rhode Island’s No. 1 SBA lender – proof, as the bank sees it, of its strong
commitment to the small businesses that are the heart of this state’s economy.
Any bank that wants to thrive in Rhode Island, Citizens will tell you, has to reach out to small business. The figures bear it out: 99.8 percent of the state’s private employers have fewer than 500 workers, and 96 percent are under 50.
That’s a lot of potential loans, and Citizens is making them. In the 12 months ending Sept. 30, the U.S. Small Business Administration says, Citizens made 716 loans worth $28.2 million through the SBA’s 7(a) loan guaranty program alone.
A modernized health plan: Supporting cost management and the employee experience.
The Surest health plan came from a group of innovators wondering: What if health care…
Learn More
Citizens won’t say what share of its small-business loans are SBA-backed. But there’s little question that, in recent years, SBA guaranties have helped Citizens build up a large roster of small loans that boost profits with little risk to the bank.
Michael Clarkin, senior vice president for corporate banking at Citizens Bank of Rhode Island, said SBA lending is “certainly” a key part of the strategy that has helped double the bank’s commercial loan portfolio in the last decade.
Given that most of Rhode Island’s businesses are small, Clarkin said, to grow, “we needed to make a lot of loans to a lot of customers.” And as an SBA “preferred lender,” Citizens has used the SBA Express loan program to do just that.
“We’ve developed a pretty strategic solid partnership” with the SBA, Clarkin said, and that benefits customers because it not only gives them access to credit they might not otherwise get, but it connects them to the SBA’s many educational resources.
Yet while Citizens makes far more SBA-backed loans than its competitors – the banks ranked No. 2 and No. 3, Bank Rhode Island and the Washington Trust Company, made only 70 and 69 loans, respectively, last fiscal year – it actually lends less money, proportionately, than its share of the Rhode Island banking market.
As of June 30, Citizens had 43.7 percent of the state’s deposits, but while it made 65.4 percent of the 1,094 SBA-backed loans last year, it only provided 30.7 percent of the $91.7 million the loans amounted to, an average of $39,387 per loan, compared with an average of $168,063 for all other banks.
Fleet and Sovereign, Rhode Island’s second- and third-largest banks, fell far shorter, with only 7.4 percent of SBA-backed loans and 9.6 percent of the dollar volume, despite their combined 32-percent deposit market share.
BankRI and Washington Trust, by contrast, together accounted for 28 percent of the loan volume, more than double their combined 11.5-percent market share.
Why the huge differences in loan numbers and dollar amounts?
Marilyn Bogue, the SBA’s Rhode Island economic development team leader, said because all the major local banks are preferred lenders, the local SBA office doesn’t see the loan applications, and can’t say where the differences come from. But she said it’s clear that Citizens has made SBA lending a priority, and uses it heavily.
The SBA loan guaranty program is designed, as the SBA’s Web site puts it, “to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels.”
The SBA doesn’t provide the money; private banks do. As SBA materials and bankers explain it, businesses start by applying for a loan from the bank, without a guaranty. If their credit is good, they have enough collateral, and they’ve been in business long enough, they just get a regular loan or line of credit. If their credit is bad, or they’re otherwise considered too big a risk, they can get rejected outright.
But if they fall short in some way – if they’re just starting or have been in business for less than two years, don’t have enough collateral, or are in an industry that’s considered higher-risk, such as hospitality, Bogue said – banks can seek an SBA guaranty to put them over the top.
The SBA makes it clear to banks that they shouldn’t seek guaranties by default, and top officials at Citizens, BankRI and Washington Trust all said they don’t. But although the SBA requires banks to say, in each case, why a loan couldn’t get a conventional approval, it doesn’t question the banks’ actual guidelines.
That means that for the same $25,000, one bank might require an SBA guaranty while another would approve conventional credit.
How often does it happen? There’s no way to tell; no one tracks such information, and without a breakdown of the number of SBA-backed and non-SBA-backed loans for each bank – data that Citizens stressed is proprietary – it’s hard to even guess.
That said, Phil Friend, senior vice president for retail lending at Washington Trust, estimated at most 10 percent of his bank’s Small Business Partners loans and lines of credit, which go up to $250,000, use SBA backing. And at BankRI, James V. DeRentis, executive vice president for retail banking, estimated that 20 percent to 30 percent of the bank’s loans under $250,000 had SBA backing.
The difference is even more pronounced with smaller amounts. Washington Trust offers unsecured lines of credit of up to $25,000, Friend noted, that would be very unlikely to require an SBA guaranty, now offered for as low as the prime rate, or up to prime plus 4 percent, depending on the customer’s credit.
Even Bank of America, the top SBA lender in at least 13 states last year, with average loans ranging from $25,000 to $35,000 in each state, seems to make fewer SBA-backed loans, by a long shot, than Citizens. It made No. 1 in its home state, North Carolina, with only 308 loans, for example. And while it promotes SBA Express loans for businesses “that might have difficulty qualifying for other types of credit,” it also has a Small Business Credit Express line that encourages small businesses to seek up to $150,000 in conventional credit.
Citizens also offers conventional small-business credit products, but it highlights SBA-backed products especially. Its business banking brochure calls SBA lines of credit and loans “perfect for any small business,” and suggests conventional credit products start at $10,000 – though Clarkin didn’t directly answer a question about whether only SBA-backed loans can be obtained for under $10,000.
But with rates capped at prime-plus-2.25 percent (higher for terms over seven years), improved borrowing capacity, and a 50 percent or more government guaranty, why wouldn’t you want an SBA-backed loan?
First of all, there are guaranty fees attached, though banks often waive them. And sometimes, conventional credit is cheaper. At Washington Trust, for example, those $25,000-and-under loans can be priced as high as prime-plus-4 percent, but they’re currently being offered at straight prime. Bank of America is now offering prime-minus-1 percent on Small Business Credit Express balance transfers.
The SBA also has a limited capacity to cover loans, so some bank officials worry that the use of guaranties when they’re not essential could hurt other customers. “The SBA is an incredibly valuable tool, but it’s not one to be misused,” said BankRI’s DeRentis. “It’s one to be applied when the circumstances warrant it.”
At the SBA, however, Bogue said the agency’s priority is to ensure that as many small businesses as possible get the credit they need, even if they’re not the most attractive loan candidates.
“There is a market for what (Citizens) is doing,” she said. “There are lots
of businesses that have small needs, and they do handle some of the bigger needs
too. What a lot of people probably do when they have small needs is to use their
credit cards, which frankly isn’t the smartest way to go.”
