SBA Stirring Up Loans for Small Companies
A more aggressive Small Business Administration is making some headway in improving lending conditions for small businesses.
By Jonathan N. Crawford, Researcher-Reporter, the Kiplinger letters
June 2, 2009
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Smaller banks will be a growing source of small business loans. More will participate in government loan guarantee programs as initiatives from the Obama administration take effect and market conditions begin to improve.
The Small Business Administration (SBA) will add staff and other resources to streamline its loan operations and outreach to banks, trying to reverse a 50% slide in bank participation since 2001.
Getting more banks to participate in SBA's 7(a) and 504 loan programs will give small firms more access to needed capital while conventional small business loans and credit cards are hard to obtain.
The SBA wants to increase the participation of smaller lenders, credit unions and community bankers, in particular, in its loan programs, leveraging the existing relationships many of them have with local business owners. At least 30 lenders have teamed up with SBA since March. And more banks are making new loans for the first time in over a year.
Anthony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders, says beefing up SBA resources to improve service is likely to bring even more lenders to the table.
But Wilkinson doesn't expect a sea change overnight. Some lenders will continue to balk at teaming with SBA, put off by the agency's fees and caps on interest rates charged by lenders. Others complain about poor past working relationships with the government agency.
"You have to realize, the SBA has been under declining resources for the past eight years, so it's going to take them some time," Wilkinson says.
Sen. Mary Landrieu (D-LA), chairwoman of the Senate Committee on Small Business & Entrepreneurship, is also pushing to bolster SBA-lender relations. "While it is encouraging that about 40% of community banks in America participate with SBA, it's discouraging that 60% don't," she says. Landrieu would like to see all small business owners, whether they are in a rural area or an urban one, to be able to tap their local community bank or credit union for an SBA loan if a conventional one is unavailable.
Having more community lenders making SBA loans could also help the program withstand financial crises, says Robert Seiwert, senior vice president of the American Bankers Association's Center for Commercial Lending & Business Banking. “The bulk of SBA loans are done by a handful of large lenders, [so] when they dial back the loans they make, that really affects the program. You have a much smaller pipeline, and you have less loan volume at the time you need a robust distribution system. [SBA] needs to engage lenders of all sizes," Seiwert says.For weekly updates on topics to improve your business decisionmaking, click here.
Reader Comments (2)
Posted by: Michael Meyer at 06/03/2009 09:02:20 AM
I am writing this to express my extreme concern over language added in Subpart B section 7(b) of this newest revision of the SOP. The US Small Business Administration has recently inserted the following paragraph into the new regulations for small business loans (page 139 of SOP 50 10 5(A) Lender Development Company Loan Programs, US Small Business Administration Office of Financial Assistance). "The lender may finance a limited amount of goodwill. In no event may the amount of goodwill financed by an SBA guaranteed loan exceed 50% of the loan amount up to a maximum of $250,000." This action creates a major threat to the future of small business sales and transfers. Small business loans used in business sales or "change of control" are frequently financed via the SBA 7(A) program. Small business owners, who are retiring, looking to exit due to illness, burn-out and so on; will be forced to simply close their doors if this regulation continues. In these small business transactions, which number in the tens of thousands each year, the bulk of the value of the small business is goodwill rather than fixed assets. This new procedure will effectively cap small business loans at $250,000. In the opinion of the most business intermediaries and bankers, the sale of small businesses will grind to a halt and thousands will be added to the unemployment lines in the midst of these already difficult times. The new language effectively caps the amount of goodwill financing to $250,000. This language effectively eliminates an entire class of businesses that are sold in order to affect succession, and keep employees working. Small businesses are valued on a multiple of cash flow, and lenders provide debt financing based on the company's ability to repay the debt. The SBA 7(a) program is designed to allow lenders to have a guarantee when collateral is an issue. Businesses that are sold by intermediaries, accountants, attorneys, and business owners all have relied on this program for decades to provide the vehicle for them to have an efficient succession plan. "Closing the doors" or providing seller financing does not allow for a healthy transfer of the business to a new owner. Goodwill, as it stands in the "space" is defined by the value created by the cash flow of the business, less the tangible assets. Large businesses are valued on cash flow, public companies are valued on cash flow, and lender loan covenants are based on cash
Posted by: STEVEN at 08/29/2009 12:07:52 PM
This is BS! Me and my wife have a business which is still growing in this enomony. We can't get a loan to expand! The SBA says get a bank to give us a loan and they will back 90% The bank says we are not the SBA and you need collateral. They won't use our savings or our house. We what do you need to back the loan? Cash! They want us to back the loan with 100% of the loan with cash! If we had the cash why would we need the loan? That's ... all of the banks around us. These are the same ... tha lent money to folks who couldn't afford it in the first place. We go back to the SBA and tell them what we are being told and the SBA says that' not right they can't do that! ...The banks won't lend unless you have the money in the bank. The economy with this type of lending isn't going anywhere fast. We are growing and adding employee's and doing our part for the ecomony what are the banks doing..! I dare one bank who reads this to say this is incorrect. Than I'll ask them to put up or shut up!