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Introducing... The Small Business and Community Lending Initiative!
By Marc Tracy
We came across this official fact sheet on the Obama administration's Financial Stability Plan, which describes in detail an initiative that is getting relatively little play but which strikes us as crucial: The Small Business and Community Lending Initiative. Here's the lead: The guarantee on SBA loans has been raised.
"Few aspects of our current financial crisis have created more justifiable resentment than the specter of hard-working entrepreneurs and small business owners seeing their companies hurt and even bankrupt because of a squeeze on credit they played no role in creating," the administration observes. Now, the government is setting out to rectify matters. Specifically, it has its eye on the calamitous drop in Small Business Administration-backed 7(a) loans, which declined 57% in the previous quarter alone.
The initiative has three broad points:
-Purchase AAA-rated SBA loans.
-Raise the SBA guarantee on its loans to 90%.
-Reduce 7(a) and 504 loan fees, and increase oversight and processing funding.
Let's look at these more closely.
The purchase of the SBA loans is nothing all that new, although the extra attention it is getting here does imply a greater focus. In December, as we reported, the Fed and the Treasury said they would lend to banks against assets backed by credit card, auto, student, and--yes--small business loans. The theory being that you have the government step in to create a secondary market for these loans, thereby prompting lenders to begin making them again (knowing they can sell them off as they did before the credit crash). A central part of the Obama administration's broader Financial Stability Plan was expanding this program from the $200 billion announced by the Bush administration late last year to somewhere closer to $1 trillion. This program should go a long way towards persuading banks to make these loans again--remember, banks are the ones that actually make SBA loans, which are then backed by the federal agency to varying extents.
Speaking of varying extents: raising the loan ceiling is the big news. While we don't have details, what we know is this. Previously, the SBA would guarantee between 50% and 90% of 7(a) loans, with 50% being the most frequent percentage. Now, the administration is putting its full weight behind a provision in its stimulus plan that would have the SBA guaranteeing between 75% to 90% of each SBA loan. That, you'll note, is a 50% increase from the previous floor of 50%. This is a huge deal, and provides a great incentive for banks to start making these loans again.
Finally, there's the reduction of fees. This was actually added to the House stimulus by the Senate, as we reported yesterday. It seems as though the Obama administration is committing to keeping the provision in there as the House and Senate bills move forward through the reconciliation process, though. It is yet another thing that should make banks less reluctant to make these loans. And the increased funding for processing and oversight should make the program work faster and more efficiently.
Finally! We see real, concrete, small business-specific stimulative steps being taken, or at least proposed. We hope this isn't the last time.
Comments (1)February 10, 2009 12:27 PM
Comments (1)
Unfortunately, almost simultaneously with the announcement of an intention to fund larger loans the SBA staff has announced its intention to stop guaranteeing business acquisition loans financing over $250,000 of goodwill. This will make the $3,000,000 cap meaningless in most cases.
Most businesses in America are service businesses and upon sale the largest business asset is goodwill. I recently was involved in the sale of a landscape business and the hard assets were valued at $200,000 and the goodwill was valued at $800,000. This is typical.
This sale would not have obtained bank financing without SBA. Under the proposed rules the transaction will not qualify for a SBA guarantee over $450,000. That is not reasonable on a business that has a true value of over $1,000,000. This will further erode baby boomers ability to retire and new entrepreneur’s ability to buy a decent profitable business.
So, while top government officials are trying to expand credit the government’s credit guarantors and bank regulators are taking actions to further contract it.
Posted by Greg Caruso | February 11, 2009 4:28 PM
Posted on February 11, 2009 16:28