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Obama’s Changes to the Small Business Administration – Welcome Relief For Small Business Owners
On March 16, 2009, President Obama, in a long-awaited speech, finally reached out to the 27.2 million small businesses in this country and reached out. He may not have been to the mountains, but he certainly walked the high street and recognized the plight of struggling small business owners. And it was only a matter of time before he did. After all, the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) nicely established provisions beneficial to small businesses, and as promised, the SBA has issued regulations to start the ball. And I’m not talking about more government promises or red tape, but economic capital that must be poured into the coffers of deserving entrepreneurs. So let’s roll up our sleeves and look at one of the biggest items that went live on Monday.
Historically, SBA loan programs had guarantees of 85% for loans of $150,000 or less and 75% for loans over $150,000 (13 CFR Part 120). On the other hand, there are some programs that only reach 50%, including the Express Loan program (for this type of loan the new guarantee will not change).
As we all know, on February 17, 2009 the President signed into law the Recovery Act which, under Section 502, authorized the SBA to guarantee loans up to 90%. On Monday, the SBA completed its review of the legislation and announced in a policy notice that the guarantee would effectively increase to 90% starting March 16 under the various 7(a) loan programs in the ‘SBA.
Simple math tells us the more collateral, the more likely the bank will make the loan. For God’s sake, 90% is knocking on the door of a 100% guarantee. Note also that the secured portion is usually sold in the secondary market (which recently closed to almost nothing in September 2008), so there is a greater chance that loans will be sold and more money returned to the banks’ coffers for more . loan
Now we will translate this into popular programs for small businesses. The Community Express loan program allows fast, affordable SBA loans of up to $250,000 (although most lenders are throwing around $5,000 to $50,000 unsecured). They are now 90% guaranteed. And remember, there are lenders making these loans now even in this economy. The equally popular US Patriot Express loan program for veterans and their spouses or dependents goes up to $500,000 and is also now 90% guaranteed. At the same time, the 7(a) loan program, which is usually for loans in the hundreds of thousands of dollars, was also increased to 90%. Not to bore you with the details, but the only exceptions are almost minuscule, ie the guarantees are not used for businesses related to gambling, aquariums, zoos, golf courses or swimming pools. In addition, the SBA will not issue a guarantee to a borrower who hires, hires, or refers for a fee employees who are unauthorized aliens, as defined by the Secretary of Homeland Security.
And it still gets better. Banks that are already SBA lenders do not have to do anything different in the loan process. That is, there is no change in the filing process to obtain an SBA Guaranteed Loan Number. They simply get their approvals from the same central processing units across the country as before. The same simplified procedures.
Of course, taxpayer dollars will fund these guarantees, especially since the borrower is no longer paying a guarantee fee at closing. In other words, the 90% guarantee will remain in place as long as there is money that Congress appropriates. The current estimate is that approximately $8.7 billion will be allocated for these guarantees, depending, of course, on the loan volume and delinquency rate.
So how will the banks react to this news? Many experts predict favorably. Obviously, with a 90% guarantee, there is less risk if the loan goes south. This also means that the robust traditional secondary market for buying government-backed loans, once it gets going, will also find them desirable to buy into investment groups. There’s also another intangible you don’t read about in the news: The environment in Washington has never been better for small businesses. Now you have an Administration that respects small businesses and wants to do everything possible to build their success.
Translation: Banks are comfortable with the new SBA (unlike the more insular and contentious regime under the Bush administrations that spent more time fighting and not communicating with lenders than trying to treat them as partners) and , therefore, more willing to grant loans even. even as default rates rise. They know that the Obama Administration will likely understand the situation because of current market conditions.
So for the small business owner, this news of 90% guarantees is very favorable. It will provide much-needed capital to startups and existing businesses for their expansion needs. Finally someone here listens.
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