Lending Environment Just Got Tougher for Small Business

Small businesses in Los Angeles have recently taken a hit. Innovative Bank, one of the largest lenders of SBA loans in Los Angeles and nation wide, was closed by the California Department of Financial Institutions and their deposits were transferred to Center Financial Corp. Executives at Center have stated that they are not going to continue Innovative Bank’s high-volume small business lending and will focus on larger loans to bigger businesses.

This is bad news for small businesses as Innovative specialized in granting small working capital loans to marginally qualified businesses through the SBA’s Community Express program. This program, which was put in place over a decade ago, has become popular with very small businesses because of the ease at which these loans can be attained. They require no collateral, little paper work, less than perfect credit, and funds are received relatively short time, usually around a week. These loans are also attractive as there are no extensive limitations on how the money can be used, and offer longer repayment terms. Most importantly, they provided increased access to essential funding for small businesses that typically have few available options for financing.

      The Community Express Program provides loans that range from $5,000 to $25,000 and can be increased to a maximum of $50,000 to businesses that are minority owned or operate in lower income areas. These loans are made on the basis that the SBA will repay the lender 85% of the value of the loan in the event of default.

      Although the loans offer some protection to the lender, they are inherently risky due to the types of businesses they attract and offer little profit to the lender.  This lack of profit margin means the role Innovative played in the lending market will likely be inadequately filled. Innovative was one of three lending groups that specialized in this the Community Express program. This means that the other two, Borrego Springs bank and Superior Financial, will have to room to greatly increase their Community Express lending however it is doubtful they will have the capital to completely fill Innovative’s void immediately, leaving small businesses with fewer options for financing.