Which comes first, the chicken-house contract or the financing? Inquiring bankers want to know.
The Small Business Administration recently raised a warning flag (and some worried eyebrows) when its Inspector General issued an audit in March questioning the eligibility of $1.8 billion in 7(a) loans to poultry farmers.
Within days, the SBA eased the anxiety by reaffirming—emphatically—that all guarantees of poultry loans previously approved would be honored.
For Arkansas bankers and chicken farmers alike, that’s a big sigh of relief. It’s hard to overestimate the importance of poultry to the Arkansas ag economy. Only Georgia produces more broiler hens than we do here, and one in ten poultry-related jobs in the U.S. is held by an Arkansan. The poultry industry contributes more than $900 million to the state and local tax rolls, and pays another $1.8 billion in federal taxes.
Likewise, it’s hard to imagine future poultry growth in Arkansas without SBA guaranteed lending. More than half of the SBA loans in Arkansas are tied to poultry, and even well-heeled growers struggle to get chicken-house loans without a guaranty. The cost of construction for a decently-equipped 8-house poultry farm can approach $2.5 million, which well exceeds the USDA Farm Service Agency loan limit. Without the SBA, the word in statewide banking circles is that entrepreneur types need not apply.
The sky isn’t falling, however, on big poultry or Chicken Little. There are ways to mitigate the SBA’s heartburn arising from the over-concentration of poultry loans.
For starters, here are the three most important factors for your bank if you have SBA poultry loans: diversify, diversify, diversify. For every poultry borrower there are many other small businesses looking to grow or expand. It bodes well for any bank to have a better balance among industries in its SBA portfolio.
The good news? Arkansas small businesses don’t get anywhere near their share of available SBA funds. So growing your SBA non-poultry loans not only helps you with poultry down the road, but also can provide bank non-interest income right now.
In addition, banks offering SBA loans that have not yet achieved Preferred Lender status are operating at a disadvantage. PLP status is more than mere prestige; it’s a classification for banks that empowers them with greater authority in approving SBA loans. And the SBA has all but said out loud that for PLP lenders, poultry loans are “business as usual.”
Junk Science Research
The SBA Inspector General’s report was flawed in a number of ways, not least of which was its sample size. Eleven loans out of 1,535 made during the defined time period (FY 2012 - 2016) is hardly enough to constitute a sample in even the broadest methodological sense of the word.
On top of errant sampling/projected conclusions, the SBA OIG report also seemed to start out with a conclusion that lead to evidence rather than the other way around. Trying to fit integrators into an “affiliate” definition in order to claim that big business was the true beneficiary of SBA loans is more than just a stretch—it’s an outright mischaracterization.
Adding to the unconvincing nature of the SBA’s conclusions is the obvious lack of homework done. Poultry growers are small businesses, period. They operate just like any other SMB, with investments in real estate and machinery and labor. And while it’s true that their business is contractually based, that’s as much a strength as a weakness. Lack of revenues is often the prime reason for SMB fails.
As with all businesses, intangibles play a major role in successful poultry farms and also in quality underwriting. If anything, what the evidence gathered suggests is that a very few large banks abused the system and were abetted by clueless processing center underwriters, some of whom are on record as referring to poultry houses as “chicken coops.”
The answer to that problem isn’t cracking down on community banks that serve agricultural areas well-suited to poultry farming. The real opportunity arising out of all this is a potential growth opportunity for a great many local banks, who can give the SBA assurance that local loan officers have some familiarity with the poultry business and oftentimes with the farmers themselves.
Shenanigans like the poultry farmer loans report, and other overreaching and reactionary SOPs, are what have contributed in part to the SBA’s less than sterling reputation among Arkansas bankers. The SBA’s mission is to assist small businesses, and as a small business state, Arkansas banks need to find more ways to maximize SBA guaranteed lending to create local jobs and enterprises.
Pendulums always swing out, and then swing back.The corrections the SBA is considering will subside, but in the meantime, an assertive and proactive posture about balanced SBA lending is the best way to keep local poultry farming expanding—and our ag economy growing.
Poultry Numbers At A Glance
*Article as published by the Arkansas Bankers Association 2018 edition of The Arkansas Banker.
Click here for a link to the online publication.