Small-business advocates and the U.S. Small Business Administration have made it a priority this year to persuade the General Assembly to reinstate the SBA loan guarantee fee tax credit, which Rhode Island was the first state to establish, in 1994, but eliminated in 2004.
The SBA charges borrowers a fee ranging from 0.5 to 3.5 percent of the loan to obtain SBA-guaranteed financing, said Norman T. Deragon, spokesperson for the agency’s local office. That can mean about $500 to $30,000, depending on the size and term of the loan.
The former tax credit allowed borrowers to reduce their corporate tax liability – or, for S corporations, LLCs, partnerships or sole proprietorships, the owners’ personal tax liability – by the full amount of that fee. Since 1998, the credit had been allowed to be spread over as many as five years. The only limit was that companies still had to pay at least the corporate minimum tax.
The SBA says the credit saved small business owners $11.2 million between 1995 and 2004.
But the credit also cost the state an estimated $1.2 million per year. Based on that estimate, said state Rep. Raymond C. Church, D-North Smithfield, who tried to reinstate the tax credit in 2005 and 2006, “it was determined it wouldn’t make the cut.”
At the time, the state had commissioned a study to try to determine the extent to which its existing tax credits were working or not working.
Unfortunately, it was an awful report,” said Grafton “Cap” Willey, a shareholder at Tofias PC in Providence and chairman of the National Small Business Association. “The logic behind it didn’t make sense. … They took the one credit that we felt was actually working and made an example of it. They eliminated it.”
Since the tax credit was eliminated in 2004, the total number of SBA-backed loans in Rhode Island has declined steadily each year: from 1,139 in fiscal 2004, to 908 in fiscal 2005, to 819 in fiscal 2006 (which ended Sept. 30). Their total dollar value dropped from $106.6 million in fiscal 2004 to $102.2 million in fiscal 2005, and rose slightly last year, to $103.1 million.
Nationally, the number of SBA-backed loans has more than doubled since fiscal 2002, and a new record was set last year, with 110,197 loans worth $19.1 billion in the two main programs.
Mark Hayward, district director for the SBA’s Rhode Island office, said he has heard from local lenders that the absence of a state tax credit makes the loans less attractive to borrowers, and therefore, more difficult for lenders to sell.
But lenders were reluctant to say the elimination of the tax credit is the only reason SBA-backed loans have been declining.
Citizens Bank, for example, posted the greatest decline in number and value of 7(a) SBA-backed loans issued since 2004. The number of approved 7(a) loans at the bank decreased by 400, or 56 percent, between fiscal 2004 and 2006. And the total value of 7(a) loans dipped by $15.3 million, or 54 percent, during that time.
Yet Joseph J. MarcAurele, chairman, president and CEO of Citizens Bank of Rhode Island, said the drastic decrease in both the number and total value of the bank’s approved SBA loans between 2004 and 2006 had little to do with the elimination of the tax credit.
“It doesn’t have any effect on the bank offering the loan,” MarcAurele said. “It doesn’t affect the bank’s decision to offer [SBA-backed loans].”
The sharp decline, he said, has more to do with more small businesses qualifying for conventional financing or conventional small-business loans, as opposed to SBA-backed loans.
MarcAurele said that overall, small-business credit scores have improved in the last couple years, which he said might be due to an improved economy.
The size of the market may also be a factor, he said.
“Rhode Island is only just so big,” MarcAurele said. “At some point, you reach some point of saturation. … You hit a point where the market is well served.”
Other lenders expressed similar thoughts on why there has been a decline in SBA lending.
“We have seen a decrease in loans,” said Bill DeWitt, senior vice president and director of marketing and corporate communications at Bank Rhode Island, one of the top three SBA lenders in the state. “But we cannot attribute that to just the elimination of the tax credit.”
DeWitt noted that interest rates in general have risen, and that often has a dampening effect on new business formations.
Still, both BankRI and The Washington Trust Co., the largest independent bank in the state, have continued to report growth in their commercial loan portfolios, though at a slower pace than in 2004, when Washington Trust grew its commercial loans by more than 24 percent.
Stephen M. Bessette, executive vice president of consumer lending at Washington Trust, said the SBA’s interest rates, which are higher than the prime rate, might also have something to do with the decline in the number and value of loans awarded in the past three years.
“The elimination of the tax credit simply made it more expensive – on a net, after-tax basis – for the borrower to secure SBA-insured financing,” Bessette said, who oversees consumer, mortgage and small business lending for the bank. “Logically, this greater cost encouraged borrowers to seek less-expensive alternatives. … In some cases they might borrow against the equity of their home or find a business partner to invest.”
SBA backing does provide an extra measure of security for the lender, and DeWitt noted that for some borrowers, it can make it possible to get more favorable terms, such as more years to pay back the loan.
Willey said he hopes this year the General Assembly will reinstate the tax credit, because “this credit was designed to help small businesses grow and create jobs.”
The SBA’s Hayward noted that statistics show that, for every $35,000 in SBA loans awarded, one job is created.
And Church continues to support reinstating the credit.
“I think the state has done an excellent job in the past couple years of improving the climate for larger companies,” he said. “We have to have more direction on the smaller companies in the state. This is a way to help them out as they seek loans to expand.”
