With a 27-year track record in making SBA loans, including five years at the legendary SBA machine Bank of Commerce, Craig Francis has the pulse of the local lending community. Today’s lenders, he says, fall into three categories.

The first are those who have shut down lending departments because of internal capital issues. “Whether they survive or not is questionable,” says the owner of Francis Financial, which is probably the largest SBA loan broker in San Diego right now, working actively with nearly 20 lenders.

The next category is banks with strict loan limits. “They are getting rid of loans and other credit facilities on their books so that their capital ratios are more in line with what the regulators are requiring,” Francis says. “Therefore they cannot make loans as aggressively or in the same volume as they did in the past. A subset is those with a good capital ratio but a fairly substantial portfolio of loans with problems. They are reluctant to lend. So they are focusing on cherry-picking the perfect loans.”

The last group retains an open policy. “They are closing $20 million to $40 million of business loans a month,” Francis says. “They are small- to medium-sized banks that are not afflicted with a large portfolio of bad loans or a lack of capital.”

The good news is “Small Street,” as Francis likes to call San Diego’s local lending community, has enough healthy lenders to keep up with demand from those with the chops to deserve the dollar.

Getting the loan can be challenging. Start-ups, Francis says, are in trouble if they are missing strength in the following areas: equity, business skill, back-up collateral, or a good FICO score. “Without those it is an uphill battle,” he says. A person with a good business plan who fails to meet those criteria should find a partner, Francis says.

“Weakly capitalized and thin business plans that were at one time easy to finance will not be pursued,” he says. “In the past, the lender might have overlooked two of the five Cs of credit (character, capacity, capital, collateral and conditions). Today they cannot afford to overlook any. It is not just because they are more cautious. The lenders today are being held to a higher standard by federal regulators, their own boards and the SBA.”

Missing from the lending arena are entrepreneurs dependent on home equity. “For the last five years, people could pull out a nice chunk of equity, $100,000 to $200,000, to get started,” Francis says. “You can’t get equity on your home easily (today). And many people have borrowed to the max, which means the weaker borrowers simply are not in the market anymore.”

A protracted lending slowdown will take its toll on weaker banks. “Every banker would love to make lots of loans,” Francis says. “A banker has one product: money. If they are not making loans they are either crippling their profits with lower-earning investments or putting themselves slowly out of business.”