Banks leery of making small business loans are getting a stronger safety net from the Small Business Administration, thanks to an infusion of federal dollars.
The American Recovery and Reinvestment Act, part of the recent federal stimulus package passed by Congress and the president, provides $730 million for SBA. That money will go to enhanced guarantees for lenders, new lending programs and more incentives to get small business owners borrowing again – although precise details are still pending on many programs.
Most notable for lenders, said Bob Nelson, SBA’s acting regional administrator for New England, is the organization’s plan to beef up its guarantees for loans made under its 7(a) program. Currently under 7(a), the SBA is only able to offer 85 percent guarantees on loans of less than $150,000, and 75 percent of loans from $150,000 to $2 million. Now, the SBA will be able to make guarantees of 90 percent for some loans.
The idea is to provide immediate help in getting banks lending to small businesses again, Nelson said, and it’s clear that some incentive is needed: SBA loans have fallen off 41 percent this year compared to the same period in 2008.
But the act allows for yet more programs aimed at getting borrowers in the door. Small business owners themselves are hanging on the sidelines right now instead of starting new businesses, so the new program reduces or eliminates the borrower fee normally required with SBA loans, which should help generate a bit more demand for these loans.
But existing small businesses also have a shot at some extra cash, with a brand-new program that Nelson predicts will see a lot of demand.
The new program provides loans of up to $35,000 apiece, made by the bank but guaranteed 100 percent by SBA, he said. Those loans are going to be used specifically for businesses to make payments on their existing loans, and the borrower doesn’t have to start repaying on the new loan for up to 12 months.
Plenty of small businesses are struggling through no fault of their own, Nelson said, and just need a little “stabilization” cash to buy them some time.
“This is a way to survive,” he said.
While the guarantees and knocked-down fees should be quickly available, the new programs will take longer to get rolled out because it has yet to get details and regulations published, Nelson said.
These announcements are still relatively fresh; the SBA is actively attempting to get the word out to banks that the new guarantees and loans are on their way.
“We’re all sort of talking generalities right now,” said David Floreen, senior vice president of government affairs and trust services for the Massachusetts Bankers Association.
Floreen met with Nelson last week to discuss the preliminaries of the programs and said the industry representatives have been encouraged by what they’ve seen thus far.
The increased guarantees, in particular, will likely pique banker interest, he said, but again – a lot depends on what guidelines eventually come out for the program.
In contrast with what Nelson reported, Floreen said borrowers aren’t being shy about applying for loans – bankers have been seeing relatively strong loan demand, and Floreen repeated the oft-heard industry assertion that most banks were well-capitalized and willing to lend.
But the economy has hit certain kinds of businesses hard, he said, and bankers can’t peer into the future and see what direction the economy will take. That makes them unwilling to take certain risks, and makes SBA’s programs a potentially welcome addition.
“There are some real challenges out there, and that’s why some of these extra programs do make sense,” he said.
