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The Entrepreneurial Agenda by Robb Mandelbaum
February 13, 2009
Congress Splits The Difference On SBA Financing
Posted at 8:21 PM
There were big differences between the House and Senate approaches to supporting small business financing. The Senate largely proposed temporarily eliminating loan fees, which might improve demand for credit but does little to prod banks to lend. The House hoped to encourage lending with a variety of new Small Business Administration programs. Happily, the conference liked both approaches. The conference report will likely pass the Senate tonight. Since it passed the House today (with no Republican support), it'll become law this weekend. Here's what's in store for small business lending:
No fees: The new bill will temporarily waive borrower and lender fees for the SBA's 7(a) and 504 loan programs, while supplies last. That supply (of money) totals $375 million, about $240 million less than the Senate proposed.
General Business Loans: The bill creates, for one year, a modified 7(a) loan with a guaranty up 90 percent, compared to the present cap of 75 percent for loans over $150,000. (The House proposed a 95 percent guaranty.) And because the secondary market for pooled 7(a) loans, which many banks rely on to make new loans, is largely frozen, the bill establishes a new "Secondary Market Lending Authority" within the SBA. This office would make loans of unlimited size to industry brokers, who would use the proceeds to buy more 7(a) loans. Finally, the bill allows the SBA to guarantee small loans to small firms through September 30, 2010, in order to pay down existing non-SBA loans. Interest on these "bridge" loans is fully subsidized, the principal (limited to $35,000) fully guaranteed, and repayment is due within five years. These particulars were not in either the House or Senate bill. The conference appropriates $255 million for these loans
Microloans: The final bill provides an additional $6 million in direct microloans, plus another $24 million to provide counseling to borrowers and administer the program.
Fixed Asset Financing: The conference bill establishes a new SBA guaranty for the portion of the 504 loan that's made by a commercial bank. The SBA can guarantee up to $3 billion under this program. It also creates a new provision allowing 504 loans in cases where the project includes debt refinancing. Finally, it revises the 504's job creation goals by allowing the SBA to guarantee $65,000 in debt for every job created or retained, up from $50,000.
Small Business Investment: The bill expands the SBA's Small Business Investment Company Program by increasing the maximum amount of leverage available in most cases from $75 million to $150 million ($175 million for funds that invest in poor areas). It requires every fund seeking new leverage to direct more investment to "smaller" companies, and increases the maximum investment an SBIC can make in one of its portfolio companies.
Construction Surety Bonds: The bill provides $15 million in additional capital for the SBA's Surety Bond Guarantees Revolving Fund. It also temporarily (until October 2010) raises the maximum project size eligible for SBA protection from $2 million to $5 million, and applies the federal size standards for the program to state contracts funded by the stimulus bill.
The Bureaucracy: The bill appropriates an additional $55 million to the SBA to manage these and other programs, including $10 million for the Inspector General's office and $20 million for "improving, streamlining, and automating information technology systems related to lender processes and lender oversight."
The Senate has been voting for the last three hours on the bill. Actually, the voting is finished but for one senator: Democrat Sherrod Brown. He's been at home in Ohio, hosting a memorial service for his mother, who died earlier this month. The White House has dispatched a plane to bring him to the capital (and the Capitol). Brown is expected to cast the deciding vote at about 10:30 pm.
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Are you kidding me? Inc, you're supposed to be an objective publication dedicated to small business and entrepreneurship. Where's the critical analysis of this irresponsible push to run more taxpayer money through the SBA. First, the SBA and small business lending are two different things. Most financing for small businesses does not happen through the SBA. The issue of thawing credit for small business has been highjacked by special interests who feed at the SBA trough. While SBA lending may down bc of the collapsed secondary market, small business lending is down because banks are skittish about the entire economy and the ability of cash strapped small companies to repay their loans. SBA lending is only a very small part of financing for small businesses. Second, restarting the SBA secondary market, while helpful to SBA lending, will only allow the usual suspects to earn fees while pushing marginal loans (with high default rates) onto the American taxpayer. Remember, if there is a 90% guaranty. When, not if, a large portion of these loans tank, the taxpayer has to pay the freight. That fact is even more important now that borrowers or banks won't be paying loans fees. Third, with the myriad number of players in the SBA loan life cycle who get a little taste of the fees generated by an SBA loan and the increased 90% guaranty, the already robust fraud factor will go up - - again, treating the American taxpayer like a slot machine. As the SBA industry is currently situated, BDOs, loan brokers, developers, loan packagers, consultants, lawyers, construction loan funds control companies, trainers and lenders who can burn/churn and sell their loans are the folks that make money in this game.
Think about it, if a lender knows that it can sell a loan as soon as the loan is made, do you think that loan will be underwritten with the same diligence as a non-SBA guaranteed loan held on that lender's books?
SBA loans help small businesses grow and build our economy. SBA subsidies just help grow the deficit. We, the taxpayers and voters, choose.
What's the matter Frank? Did you get turned down for a loan because your credit was bad or something? The SBA programs are that rarest of government programs...programs that do what they are supposed to do. It allows lenders to make loans to borrowers that cannot otherwise obtain credit. It puts people to work. Without these programs, we would not have companies like FedEx, Ben & Jerry's, Apple Computer, etc. Any one of these, and many others' tax bills are more than adequate to pay for the program in whole.
The programs have been bastardized to a certain extent over the past several years and this has even been encouraged by SBA personnel at the highest levels. The 7(a) program has seen most lenders focus on real estate loans and neglecting the working capital and business acquisition needs of the small business community.
The subsidies included in this stimulus package, which reduce or eliminate the fees and the increased guaranty percentages are unnecessary steps and the result of Washington being out of step with the industry. If they had simply bought up the loans that are constipating the secondary market, allowing the poolers to begin buying loan production again, the lenders would get back to doing what they do...making loans.
The problem is that the SBA cut off the knees of the 7A program just as congress was passing the bill.
The new SBA regulations taking effect March 1 limit the amount of goodwill that can be financed to $250,000. Almost all small businesses are service oriented and goodwill is a substantial portion of any SBA 7A loan. Heavy asset businesses with lots of machinery are top heavy with existing debt and usually do not produce cash flow ( not good acquisition candidates). Plus, the banks will only value the hard assets at liquidation value as collateral anyway.
The result will be no SBA 7A lending to small business over $300,000 in value.
This is an aspect of the story no one is reporting
The SBA just killed any 7A lending.
Just as Congress was passing the stimulus bill the new SBA regulations on March 1 limit the amount of goodwill to $250,000 for any business sale.
Most small profitable businesses are service businesses and the sale involves significant goodwill. That is reality. Business that have a lot of machinery or inventory are not profitable, have high debt already and the banks will only value the hard assets at liquidation value on the loan.
Consequently, any small business over $300,000 will not receive SBA 7A financing.
Someone needs to look at this aspect. SBA 7A lending is dead unless the goodwill restriction changes
To me this is huge. Such a major improvement. The biggest flaws with the SBA programs have been 1. the floating rate of the 7a 2 the expense of the loan (for example 2.75% of 75% of the total loan amount on the 7a), which is at least double conventional financing and that you can not refinance with a 504. Now that appears to be resolved.
I always question why the government set up a program with a floating rate. It was what 14 month ago that prime was at 8%? Borrowers that took loans in 2002 (when prime was at 4%)sat and watched their rates and monthly payment nearly doubled and most of the time they couldnt do anything as the LTV was much higher than conventional financing would allow - so they could just refinance. That will force people to default.
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