New Hampshire Firms Bolstered By SBA Lifeline

Bank failures even jeopardize paid-up loans

WHEN its bank failed last fall, Wesbell Electronics was in trouble - like hundreds of other small businesses in New Hampshire. Its survival depended on finding a new source of credit.

The four-year-old company, which makes electric wiring, had never missed a payment on its loan, and sales had gone up 40 percent last year despite the region's recession-bound economy.

But as owner Ken Bell sought credit with other banks, he found no takers. Although Wesbell's "trend had always been up," banks were leery because of the state's frozen economy and the young company's liabilities, he says.

Enter the Small Business Administration. The SBA, an agency of the federal government, agreed to help Peterborough Savings Bank bear the risk of the loan, thus saving the jobs of Wesbell's eight employees.

Now, through a pilot program started last month, the SBA wants to give this kind of help to other small businesses in New Hampshire, many facing a similar financing predicament to that of Wesbell. In the process it expects to save several thousand jobs.

By March the SBA hopes to begin similar programs in other New England states, starting in Maine and Massachusetts. The agency has requested more funding from the White House and Congress to expand the program.

Hundreds of loans to small companies are in jeopardy because of the failure of 12 Granite State banks in the last two years, including five of the seven largest. When a bank fails, its loans wind up in the hands of the Federal Deposit Insurance Corporation (FDIC). Usually the best assets are sold to other banks. But many loans, like Wesbell's, are considered risky, even though borrowers are making payments.

After a year of negotiation, the SBA and FDIC agreed in October on a means by which the SBA could cull the FDIC's "bad asset pool" to find loans that might be restructured with an SBA guarantee. Many of these loans already have SBA guarantees, but the terms may need to be restructured due to changed business conditions. The SBA hopes to guarantee $96 million in loans to small New Hampshire companies.

"It's probably going to go a lot higher than that," says William Phillips, district director for the SBA in New Hampshire.

He notes that it is too early to determine how successful the program will be. To date, the SBA has guaranteed three loans under the program, while 579 firms have been targeted as potential participants.

The agency is sending letters to companies that may be candidates for guarantees, and the program is likely to pick up steam as responses begin to flow in, Mr. Phillips says.

The SBA, founded in 1953, has long guaranteed loans that banks would otherwise view as unsound. Even if a business plan appears strong, the lack of collateral or an operating history often discourages a bank from making a loan. If the SBA agrees that the business plan is viable, it will guarantee up to 85 percent of the loan's value. The bank would bear 15 percent of the risk.

UNDER the new program, companies must meet the same credit standards that the SBA has traditionally required for its guarantees.

The program promises to save jobs in the region that has been hardest hit by the recession and bank failures. Through it the federal government avoids costs for unemployment payments and FDIC action, and banks get to make loans with reduced risk.

"It's not a panacea to the entire problem, but it's one method of addressing it," says Charles Monaghan, senior vice president with Peterborough Savings Bank.

The FDIC is expected to announce in a few weeks the company that will take over the bad-asset pool from the five failed banks. Subsidiaries of major banks such as Chase Manhattan and Banc One Corporation of Columbus, Ohio, are bidding for the job. If the winning bidder is forced to liquidate many of the loans, the consequence could be a further drop in property values and jobs, which would ripple out and hurt the state's healthy banks. Here the SBA program could help by putting some loans back on solid f ooting, says Gerald Little, president of the New Hampshire Bankers Association.

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