SBA hopes to kick-start lending to small businesses

March 30, 2009
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U.S. small businesses employ about half of the nation’s workers and over the last decade have created some 70 percent of all new jobs, according to the U.S. Small Business Administration. But SBA loans, which have long been the largest generator of business loans in the nation, have been down by about two-thirds because access to credit and lending has dried up.

The SBA hopes to turn that around by implementing two key provisions of the new economic recovery act: The temporary elimination of certain SBA loan fees and the raising of guarantees on some 7(a) loans from 75 percent to 90 percent.

With the U.S. Treasury’s commitment of up to $15 billion to get lending markets flowing again, the SBA stands ready to put much-needed capital into the hands of small businesses, said national SBA Acting Administrator Darryl K. Hairston.

“We hope small businesses will take the opportunity to ask their banks about the SBA loans that might be available to them,” Hairston stated in a recent press release. “And we encourage community banks and other lenders to work with us to reach as many qualified borrowers as we can during these difficult times.”

Since March 16, the SBA has temporarily raised guarantees to up to 90 percent on its 7(a) loan program through calendar 2009, or until funds are exhausted. According to the SBA, the increase in guarantee levels will “help provide banks with the greater confidence they need to extend credit during the current recession.”

The 7(a) loan is the SBA’s primary and most flexible business loan program, since financing can be guaranteed for a variety of general business purposes, such as working capital, machinery and equipment, furniture and fixtures, land and building — including purchase, renovation and new construction — leasehold improvements, and debt for qualified small businesses.

In order to qualify for a 7(a) loan, borrowers must be unable to secure conventional commercial financing on reasonable terms and be a “small business” as defined by SBA standards. The maximum 7(a) loan amount is either $2 million or $4 million, depending on the purpose of the loan. For most purposes, the SBA’s maximum guarantee for any borrower remains at $1.5 million, or 75 percent of a $2 million loan. Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets, according to the SBA. Basic 7(a) loans are delivered through commercial lending institutions.

“If you get turned down by a lender, try another one,” advised SBA Michigan District Director Richard Temkin. He noted that Huntington Bank is currently the top SBA lender in Michigan.

At the same time, the stimulus authorized the SBA to temporarily eliminate fees on its 7(a) loans for both borrowers and lenders on Certified Development Company loans, also through calendar 2009 or until funds are exhausted. CDCs are public/private sector organizations established by local development agencies to advance economic development in their communities. Through the 504 program, CDCs provide fixed asset financing to small growing businesses. Loans approved under the 504 program must create or retain jobs. Typically, 50 percent of the financing comes from a bank, 40 percent from the CDC through an SBA guaranteed debenture, and 10 percent from the small business owner. That translates into more capital available to small businesses at a lower cost. Elimination of the fee is retroactive to Feb. 17, the day the recovery act was signed into law.

SBA Express Loans, which have a 50 percent guarantee, are not affected by the new directives. The SBA does not provide either grants or direct loans, Temkin pointed out. The SBA does not loan to real estate developers and nonprofits, either. Temkin said all SBA loans require a personal guarantee.

Additionally, the economic recovery act authorized Treasury to commit up to $15 billion to purchasing small business loan securities currently frozen on the secondary market. Treasury’s purchase of the bundled loans on the secondary is expected to unlock those markets and free up more capital to jumpstart small business lending.

The freeze-up in the secondary market has had a very negative impact on SBA lending over the last several months, so whatever Treasury can do to free up that market will have a significant positive impact on SBA lending in Michigan and the rest of the country, Temkin told the Business Journal.

“The unlocking of secondary market is very important because banks that sell the guaranteed portion of SBA loans on the secondary market need the liquidity that they get from that to make additional loans,” he said. “Hopefully, the banks that do sell on the secondary market will be able to clear up their backlog and have the liquidity to make additional loans now.”

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