Frank Bass and Rita Beamish
Redwood City, CA — As the effects of the economic collapse began pouring down Main Street, the 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 Houlton, Maine, to a graphic arts design company on the island of Hawaii.
Despite having loans written off, little companies such as Caffe Sportivo, an espresso shop and small gym in Redwood City, Calif., 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 was 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 re-emerge 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 bought $2.1 billion in bad loans from lenders last year. Agency officials say it’s likely there will be another high this year as the recession nears the two-year mark.
“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 brighter 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 get any more collateral or money from the borrower.
Years can elapse between the time when 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 $1.3 billion in defaulted bank loans it had guaranteed. Many loans were part of a backlog, according to SBA officials.
“I have never seen it as rough as it is right now,” said Scott Hauge, president of Small Business California, a business advocacy group.
Small businesses account for half of all private-sector workers and have created roughly half of the nation’s jobs during the past decade. They received some help from the $787 billion federal stimulus package in February. Congress also authorized the U.S. Treasury to buy $15 billion in pooled loans to encourage lenders to provide money to small companies.
The White House has floated a proposal to take money from a $700 billion bailout of the financial system and provide small companies with working capital, letting them 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 Garcia 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.
Garcia expanded fast, never imagining how quickly his booming business would decline. When he couldn’t pay up, his bank wrote off nearly his entire $45,000 loan.
“It’s too much of a loss,” he 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 tries to stay optimistic.
“Anytime anyone asks me how it’s going,” she said, “I say the same thing, ‘It’s going really good.’”