New small business loan still needs to work out kinks
Four months after its enactment, the economic stimulus bill that Congress passed in February is drawing fire for not injecting money into the economy as quickly as promised. One illustration is a Small Business Administration loan program funded by the bill that finally launched this week, providing a trickle of help to struggling small business. The government is presenting the program as a win-win situation for the small companies (and itself, of course), but lenders simply don’t see the incentives.
Small businesses, which collectively employ more people than large and mid-sized companies, are being hit hard in this recession. The America’s Recovery Capital Loan Program -- interest-free loans of up to $35,000 to qualifying businesses – is SBA’s answer to its constituents’ growing hardship. Private banks make the loans but the government guarantees them, minimizing risk for the banks. Win-win, right? Not exactly. The program didn't start until June 15, and the reception from lenders was cool.For example, spokesmen for two Los Angeles area banks -- one large, one small -- expressed reservations about the program because they didn't know enough about how it would work, who would benefit and how the lenders would make any money from it.
So far, most Southern California banks that are also SBA lenders have either not signed on or put a cap on the number of loans they will provide. Both the smaller Gilmore Bank that serves Los Angeles and California giant Bank of the West told me yesterday that they’re still exploring their options, including tacking on their own addenda to the SBA’s guidelines, and therefore haven’t yet agreed to participate.
Christopher Lorenzana, the public information officer for the SBA’s Santa Ana District Office, said 10 out of about 125 lending banks in the Santa Ana district have contacted the office about the program, and the office has been conducting web chats and teleconferences to provide participating lenders with more information. The SBA seems to have taken the necessary precautions to make sure the loans go to businesses with the financial wherewithal to survive the downturn. And it has made it clear that the money can be used only to lighten a company's debt load. But because borrowers don’t have to make payments on the loans for a year, lenders have to front the cost while getting little in return from Uncle Sam.
To compensate the lenders in the program, the SBA will pay interest on the loans they issue -- but at a rate that's much less than what banks usually charge. As a result, banks are being offered next to nothing by the government to make what most lenders regard as puny loans. SBA lenders want bigger loans that make banks more money, and a higher interest rate.The SBA is dangling a few carrots in front of lenders, but it doesn’t seem to be enough to persuade them there’s a benefit for more than just the borrowers and Washington.
--Catherine Lyons
Photo: SBA Administrator Karen Mills speaking to small business owners in Ohio earlier this month. Credit: AP Photo / Skip Peterson
Well the fact that more and more business owners are
struggling is no secret.
The most important thing right now is for small
business owners to realize that this is the time to get
creative!
Sincerely,
Ilya Bodner
Small Business Owner
Initial Underwriting Group
Posted by: Ilya Bodner | June 29, 2009 at 03:24 PM
The banks get zero risk plus interest. They should stop the grand standing and support their local communities. I had a meeting scheduled with Citizens Bank last week to discuss an ARC loan and they canceled at the last minute saying, "we don't have an application for you to submit".
This is an absolute joke!
Posted by: John | June 25, 2009 at 05:24 AM
One big problem for borrowers is locating a loan from a lender who is not their bank. Many of the banks want to provide loans to current customers only, especially if they hold a loan from that customer. Also, many banks have additional requirements for the loans beyond what the SBA has required. But not one of the banks is happy about having to process and underwrite a loan package for a $35,000 loan that requires nearly as much information as a needed for a regular sized SBA 7(a) loan.
My company, Business Borrowers Alliance, is contacting the large and mid-sized banks to learn if they are participating and what their specific requirements are. We provide direct assistance and help to businesses throughout the complete ARC Loan application process. For more information, contact us at 866-944-3866 or mail@businessborrowersalliance.org
Posted by: Neal Gordon | June 20, 2009 at 03:27 PM
The blogger should remember that the SBA was allocated money in the Recovery Act (aka stimulus bill) to create this new, temporary program. The total allocation was $255 million for the program, which includes the funds to pay the interest to the lenders (making it a no-interest loan to the borrower). In creating the program, SBA had to balance the fact that a higher interest rate would mean fewer ARC loans to businesses who need them.
Posted by: Daven Fan | June 19, 2009 at 10:45 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 flow. Why then, would the SBA add language to the SOP eliminating the ability to get financing for healthy businesses that are transferring to new ownership (many of whom may be displaced employees right now), allowing for the business to thrive with fresh insights, and the seller to have a healthy retirement?
This change will eliminate an entire class of Americans from attaining the very thing that they risked everything for when starting a business! Additionally, there are thousands of intermediaries who will be forced to seek other venues for employment, all with the stroke of a keyboard! With the government bailing out everyone else, why in the world would the SBA eliminate the ability for a good business to be sold?
Posted by: Michael Meyer | June 19, 2009 at 05:18 AM
The industry is holding off on these loans, in fact 60% strongly refuse to make these loans.: see results here. http://www.colemanpublishing.com/public/771.cfm
Posted by: Joseph Coleman | June 18, 2009 at 03:02 PM