Stimulus bill could spark SBA loans

March 2, 2009
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Citizens Bank announced Feb. 19 that it will increase the number of SBA loans it provides as a result of new incentives in the federal stimulus package that are designed to pump up small business lending.

Richard Temkin, Michigan Small Business Administration District Director, said he would expect to see more SBA lenders follow suit because that was the objective of the SBA lending directives in the stimulus bill. 

Under the small business provisions of the bill, the SBA is authorized to temporarily increase the government guarantee on certain types of SBA 7A loans from 75 to 90 percent and temporarily remove the guarantee fees the SBA charges lenders and borrowers, explained Thomas Zernick, vice president and head of SBA lending for Citizens Bank.

SBA 7A loans are the bread-and-butter term loans the SBA provides small businesses for the purchase of equipment or a building, to expand a facility, refinance debt and provide permanent working capital. Temkin said the SBA is awaiting clarification as to which SBA loans are actually affected by the bill. That will be spelled out in an upcoming SBA policy notice. Temkin said that SBA Express Loans, which have a 50 percent guarantee, are not affected by the new directives.

“The net effect is that the guarantee will go up to 90 percent at least on some loans,” Temkin said. “I understand the folks in Washington are very busy putting things together to explain all of this to us.”

Temkin said the economic recovery bill offers fast relief for small businesses through a small business stabilization financing program, under which the SBA can issue or back loans of up to $35,000 to help small business to make payments on existing non-SBA loans. 

SBA lending has been down primarily because banks can’t resell those loans to investors. The stimulus bill authorizes the SBA to guarantee up to $3 billion in debt of those loan bundles, which is expected to make them more attractive to investors.    

“The expansion in our secondary market is more complicated, and I’m not sure when they’re going to have that figured out, but the freeze-up in the secondary market has had a very negative impact on SBA lending over the last several months, so whatever they can do to free up the secondary market will have a significant positive impact on the SBA lending we would be doing in Michigan and across the rest of the country,” Temkin said. 

Zernick said other banks might follow Citizens’ lead, depending on their appetite, their capital position, their liquidity position and their willingness to fund loans.

“Citizens is very strong financially, and we have the ability to continue to lend,” Zernick said. “We really wanted to promote President Obama’s stimulus bill and take advantage of the credit enhancements the SBA provides for small businesses.”

Zernick believes the changes are meaningful for small businesses, particularly in that they substantially reduce the SBA fee to borrowers.

“That can be anywhere from 2 percent to 3.75 percent of the guaranteed amount on the SBA loan,” Zernick observed. “For example, if a borrower has a $1 million real estate purchase and he’s going to do it with an SBA loan, that’s going to save him $26,250. Those are hard dollars the borrower can use for other purposes.”

On the subject of credit, there has been talk of banks calling in business loans that are not in delinquency. Temkin said his office has heard some of those stories, too. Bank of America, for instance, called the mortgage loan of Great Lakes Home Furnishings two weeks ago even though the store owner said he has never been delinquent on a payment. That has forced the company to close two retail stores in West Michigan, and 100 people will lose their jobs as a result.

“We have definitely heard of banks taking these kinds of actions,” Temkin said. “It’s all anecdotal, but we have heard it a significant number of times. There’s no doubt in my mind that these things are going on.”

The Michigan Retailers Association has heard of a few cases of retailers having trouble getting loans for an expansion or other project, but nothing about having loans recalled out of the blue, said Tom Scott, MRA’s senior vice president of communications and marketing. 

The word is that banks are also attaching personal assets to business loans, such as the business owner’s home. It’s common knowledge that banks are tightening their credit criteria, and it certainly doesn’t surprise Temkin to hear that they’re looking for more collateral than they used to.

“Having said that, I can tell you that for any SBA guaranteed loan, we take a personal guarantee of the principal borrower,” he added. “That has been standard procedure for years, so it’s not new as far as SBA loans go.”  

Michael Rogers, vice president of communications for the Small Business Association of Michigan, said that in the current tightened credit market, he’s not surprised either that banks are doing everything they can to secure business loans.

“What we’re hearing from our members is that you have to have really good credit,” Rogers said. “No doubt some of them really want to borrow, but the credit requirements are so stringent they can’t get a loan.”

Rogers said a lot of the association’s member companies in West Michigan simply aren’t in the credit market right now, so they’re not affected: “They are conservatively managed and if they need to buy computers or equipment, they just save the money; they don’t borrow it.” 

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