Mario Cruz had operated his Dudley Square sandwich shop, a mainstay for local mailmen and shop workers, for nearly a decade without a bank loan.
Instead, Cruz, a Guatemalan immigrant who started as a cook at Mario’s Subs & Sandwiches before buying it in 2006, relied on family for financing.
Like many small business owners, he had been shut out of traditional bank financing, which dried up in the wake of the 2008 financial crisis as banks opted for safer bets. Since then, small business loans nationwide have fallen by almost a quarter, from $662 billion to $510 billion in 2015, according to federal regulators.
Now, the Federal Home Loan Bank of Boston and some local banks are trying to reverse that trend and increase small business lending throughout the region.
This year, the Federal Home Loan Bank of Boston, which acts as a bank for local financial institutions, set aside $15 million over three years to encourage more small loans to businesses.
The federal money will subsidize the interest rate on loans that member banks give to small businesses that create jobs, allowing banks to offer lower interest rates.
Banks are trying to rejuvenate their small business lending, which has been stagnant since the financial crisis, at the same time they face more competition from online lenders.
Boston Private Bank & Trust Co., more often in the business of handling the wealth of the well-heeled, has sent small businesses in the Boston area handwritten notes promoting their loans. And it’s hired more diverse loan officers in a bid to expand their customer base.
So when Cruz wanted to upgrade his sandwich shop and expand the menu to keep up with the hip new coffee shops and restaurants popping up around his Roxbury neighborhood, he asked Boston Private Bank for a loan and was quickly approved.
“I wanted to compete with the changes in the neighborhood,” Cruz said through a translator. “It’s good for me. Making all these improvements has increased my business, too.”
Boston Private, through the Federal Home Loan Bank program, was able to offer Cruz a five-year, $28,000 loan at a 3.5 percent interest rate, instead of the going rate of about 5 percent.
The lower interest rate will save Cruz money that he can reinvest in his business, said Ken Willis, a vice president at the Federal Home Loan Bank.
Spurred by the loan subsidies, member institutions have borrowed $25 million this year from the Federal Home Loan Bank to loan to small businesses and have asked for another $9 million.
The loans are interest-free to member banks, so they in turn can offer loans to small businesses at a lower rate, Willis said. “The money is definitely getting out the door,” he said.
Banks throughout New England, including several in Massachusetts, are participating.
Brookline Bank, Cambridge Savings Bank, and Crescent Credit Union in Brockton have lent money to a food processing facility, a gym, a pizza parlor, a bakery, and a computer consulting company, among others.
The loans are usually about $20,000 but can be for $3 million or more, Willis said.
Banks have been reluctant to make small business loans, those under $1 million, in recent years, in part because many of them became more risk-averse after the financial crisis, said Esther Schlorholtz, the director of community investment at Boston Private.
Banks have less assurances that a small restaurant, retailer, or manufacturer will be able to pay off a loan, Schlorholtz said. They can be hurt by a sudden downturn in their industry, a similar business opening nearby, or a landlord changing their lease.
So banks have traditionally charged higher interest rates to small business borrowers, she said.
“It’s very hard to do small business lending,” she said. “It depends much more on external factors.”
That’s why having the Federal Home Loan Bank of Boston subsidizing some of the costs of the loan can be helpful for banks, she said.
“It allows us to have some cushion,” Schlorholtz said.
Joyce Stanley, the executive director of Dudley Square Main Streets, a nonprofit community development organization, said without access to bank lending, many local business owners turned to their credit cards, with far higher interest rates, to keep their businesses afloat.
Stanley said she hopes that the Federal Home Loan Bank program and increased interest from banks to lend to small businesses signals a shift.
“It’s the smaller ones that need the help,” Stanley said. “You’ve got to have working capital.”