Small business owners’ recession-plagued access to capital, already propped this year by considerable federal stimulus, apparently stands to benefit from further support.
Herbert Allison, head of the $700-billion-federal bailout fund, told the U.S. Senate Banking Committee last month the U.S. Treasury would buy up to $15 billion in securities backed by loans guaranteed by the Small Business Administration.
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But Allison, an assistant Treasury secretary, stayed mum about the program’s start date, again teasing lenders frustrated by the slow rollout of the money, which was set aside in March.
Like most sectors of the economy, small business lending collapsed a year ago. In the fourth quarter 2008, the loan volume at SBA was off nearly 60% from a year earlier. In southern California, for instance, monthly loan volume for the SBA-guaranteed programs dropped from $67.7 million in September 2008 to $15.9 million in January of this year.
But by August, volume had climbed back up to $38.6 million. Why?
The American Recovery and Reinvestment Act, which took effect in February, offered several strong inducements to small business owners and lenders:
The bill set aside $375 million that allowed the SBA to offer loan guarantees of up to 90% to lenders, up from 75% previously. The money also temporarily eliminates borrower fees in the SBA’s popular 504 and 7(a) loan programs.
It funded $255 million for the American Recovery Capital program, which provides no-interest, deferred repayment loans of up to $35,000 to provide a "bridge" for viable small businesses facing economic challenges.
The interest rate for a 20-year SBA 504 loan, which finances purchases of commercial real estate, hit a record low of 5.14% in September. The September bonds that fund SBA loans were sold to investors at a rate of 4.2%. The low sale price, plus the fee elimination provided by the stimulus bill, resulted in an effective interest rate – including fees – of only 5.14% for borrowers in September - the lowest since the program began in 1986.
“It appears that some of the incentives adapted last spring are starting to pay some dividends for small business,” said Brian Burke, principal of SBA Access, a lending consultantcy with offices in suburban Dallas and Denver. “Virtually all business lending came to a screeching halt early in the year, SBA lending was off by upwards of 60%. It's still off year over year but the trends are improving.”
The key incentive, Burke added, “is the higher guarantee percentage from 75% to 90%. Lenders still have some risk but this helps mitigate some of that and should improve profitability as well.”
Average weekly loan dollar volumes rose more than 50% in the 7(a) and 504 programs, compared to the weeks preceding passage of the stimulus bill. In July, SBA loan volume was only 6% lower than SBA’s monthly average for fiscal year 2008.
JPMorgan Chase (JPM) reported its small business lending in the second quarter was up 32% over the first quarter. Birmingham, Ala.-based Regions Financial – a big small-business lender – reported a 31% hike over the first quarter. Collectively, the top 22 banks getting federal stimulus money reported in June a 26% increase in new small business loans over the previous month, says the Treasury’s latest lending survey.
In Wisconsin, for instance, year-over-year totals for government-supported business lending increased for the fourth straight month in August , SBA data shows. Commercial loans guaranteed by SBA were up 80% from August 2008, $50.4 million compared to $27.9 million. The volume of loans increased too - 235 in August 2009 compared with 154 last year.
Minnesota has also seen an increase in weekly loan volume since the stimulus act was signed. As of Sept. 21, SBA guaranteed $337.4 million in lending to more than 1,000 small businesses in the North Star State.
Yet obstacles remain for small business owners and lenders.
Many small businesses prefer to deal with smaller banks, which have proven more vulnerable to recession than their larger counterparts. This year the FDIC has closed 98 banks, according to the Associated Press, most of them smaller, regional lenders.
So there are fewer lenders to approach for a loan, and those left standing are tight-fisted and reluctant especially to deal with companies that have any credit problems.
“For those who have a great credit rating and no recent derogatory marks on their record, yes, the money has started flowing again,” said Daniel Drew, owner of UnsecuredBizLoan.com. “For many who have had problems that have hurt their credit during the recession, getting a loan has been harder.”
Indeed, a July survey of senior loan officers by the Federal Reserve showed more than one-third tightening terms for small-business loans in the prior three months, while only one reported easing terms. Since many business owners have seen their credit scores worsen from recession, they're less able to qualify for loans.
“Credit scores are lower right now than they were this time last year,” Drew added. “ There are plenty of options out there for those with bad credit, such as business cash advances and other similar products. But many with credit issues still want to get a normal business loan and refuse to look at any alternative business financing. Sadly we have seen some of these businesses fail.”
The program promised in September by assistant Treasury secretary Allison is meant to address another persistent problem, the so-called secondary market.
When banks loan money, they can get their money back quicker by selling secondary investors a “bundle” of loans, known as asset-backed securities. This gives them an immediate cash infusion rather than waiting for the loan to be paid in full. But the massive bundling and sale worldwide of questionable subprime mortgages contributed mightily to the global recession last year. It gave that investment product a bad name and brought secondary sales of asset-backed securities to a halt. As a result, many banks were forced to turn a deaf ear to small business loan applicants.
In August 2008, 47% of the SBA's loans were resold on the secondary market. By October , that number was 24%.
The secondary market has thawed somewhat this year as the economy has rebounded and some investor confidence has returned. But presumably, the Treasury plan to buy $15 billion in securities backed by SBA loans would further motivate the secondary market as well as banks and potential loan applicants.
Finally, there is mounting angst over that fact that all federal stimulus programs are scheduled to end this year unless Treasury Secretary Timothy Geithner is successful in getting Congress to extend them. Lacking such an extension, 1) SBA loan guarantees would revert back to 75%, 2) no-interest bridge loans would cease and a host of other programs would expire.
Most observers predict an extension of the stimulus programs, and news reports suggest that Treasury officials are in talks with the White House about how best to approach Congress. The stimulus bill says Geithner must justify to Congress “the extension is necessary to assist American families and stabilize financial markets, as well as the expected cost."
Thus Geithner begins the delicate task of trying to shrink the extraordinary government reach into the economy over the past year, but doing so carefully. According to a Treasury document given to reporters in early September: "Our policies have been sufficiently successful that we can begin planning to reduce the government's direct involvement in the financial sector, but we must move cautiously or risk a relapse."
The fragile health of small business lending hangs in the balance.
Rob Reuteman is a Denver freelance journalist and former business editor of the Rocky Mountain News.