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Be Careful What 7(a) Help You Wish For

By Bizbox

Earlier this week, as we discussed yesterday, the Small Business Administration publicly urged banks to, in effect, go easy on small business borrowers who had taken out 7(a) loans, which are partly backed by the SBA, given the current credit market and general economic environment. The SBA said the banks ought, for example, to make three-month payment deferrals and not call in loans whose collateral has crashed during the mayhem of the past month-and-half. We were very warm to this notion, if also fairly incensed that the best the SBA can do is politely ask the banks--some of whom are in the midst of getting the first wave of a $700 billion injection of federal government capital--do this rather than force them to, in the way that, you know, agencies of the federal government generally are able. (In fairness, since most banks participate in the 7(a) program, and since most of those same banks are currently benefiting from that aforementioned bailout package, most are likely to listen to the SBA's, er, suggestion.)

While we still would like to see some slack cut to small business borrowers at this time, The New Entrepreneur comes through with an insightful, counter-conventional wisdom post that wonders if encouraging the banks to go lenient now could backfire in the future in the form of a further, voluntary tightening of credit. If banks are told not to enforce their current 7(a) loans according to the terms under which they were initially made, the post asks, then aren't they less likely to make future such loans for fear that they will once again be asked not to request payment when it is due?

The blog talks to a banking consultant who articulates this fear: "I think a lot of banks will bend under that pressure in order to placate the government and to appear to be good corporate citizens," he says. "But there is an unintended consequence. It could undercut lenders' enthusiasm for using the SBA system."

Of course, the problem with this is the bizarre lack of power the SBA has. Imagine if the SBA had the power not to ask the banks to go easy, but to make them? And imagine if it had the power to make them continue to offer a steady level of 7(a) loans to worthy small businesses? Before you object that that's too much power--that under that scenario the government, in the form of the SBA, is playing too much of a role in dictating how the private banks operate--let's remind ourselves of the absolutely massive and in this country unprecedented role the federal government is currently adopting in this very industry with the bailout package.

In fact, here's an idea: you want your cut of that $700 billion? Then one condition is that a certain percentage go to 7(a) loans. That could go a long way towards helping credit-choked small businesses, and maybe an even longer way towards convincing those small businesses that the federal government is dedicated to getting them through these tough times, too.

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