Thawing the Credit Crunch at the SBA
A number of small business and franchisor advocates are chiming in about the need to prime the lending pump at the Small Business Administration.
In October of last year, the credit markets froze, including the SBA’s secondary market that buys SBA guaranteed loans from banks at discounted prices. The results were that SBA-backed lending was down by over half from the year before. In March, Congress awarded slightly less than one percent of the American Recovery & Reinvestment Act’s $787 billion to be used by the Small Business Administration to stimulate small businesses.
Confirmed as the head of the Small Business Administration in April, Karen Mills stressed how the SBA is helping thaw the availability of loans to small businesses. Mills told BusinessWeek last week that the $731 million that Congress has allocated to the SBA is seeing some effect. “Since the passage of the Recovery Act, our loan volume is up 40%,” she said. “And [we] have put $6.2 billion in the hands of small business. We now have 600 banks lending that had not made a [SBA] loan since October 2008.”
But Matt Shay, the CEO of the International Franchise Association, a trade group representing largely the interests of franchisors, is concerned. “We are concerned that signs of recent increases in SBA loan activity are creating a false sense of recovery of this key marketplace,” Shay said. “The activity has been predominantly real estate refinancings. While important to help some small businesses stay afloat, these ‘re-fis’ do not equate with job creation.”
Shay further stressed the gravity of the situation that the franchise world faces. “At least 200,000 jobs have been lost in franchised businesses and more than 15,000 retail units have been lost.”
Accompanied by Ken Walker, CEO of Driven Brands, and Jon Luther, executive chairman of Dunkin' Brands, Shay met with officials at the Treasury Department and the Federal Reserve. In the meeting, the IFA team reiterated that last week’s CIT crisis, where the mammoth small business lender came close to declaring bankruptcy, is a symptom of a broader problem. The association representatives were especially concerned about an inability to sell and expand franchise systems because loans could not be secured by franchise owners. Franchises have few remaining options for finding loans.
Bob Coleman, the publisher of ColemanPublishing.com, a site dedicated to watching SBA developments, agrees that lending remains dried up. “If you look at the top 50 lenders only 25% of them have an increase in volume from this year over last year. So do you see signs of that increasing, not yet,” he said in a Fox News interview (YouTube videostream). Coleman continued, “But there are very few of those banks that have stepped up to replace what will be the drop in SBA lending.”
The IFA emphasizes that now is the time for an effective program that could better spur small business lending. “We encouraged the government to create a more viable secondary market for small business loans along the lines of what was discussed by officials in March to use stimulus money to clear secondary markets,” Shay said. “We are encouraged that policy makers are actively considering this and other programs to address the credit access issue.”
Ms. Mills told BusinessWeek, “You have to give these banks time. This program [that provides zero percent interest bridge loans to distressed companies] has a different level of risk than we usually take, and we had to be very clear about what a viable small business was. They must have been profitable within the past two years and show how [they] will transition back to profitability and pay back the loan.”
The IFA suggests increasing the maximum amount of SBA 7(a) loans to $4 or $5 million for medium size borrowers, and loosening audit standards so that lenders do not have to fear losing the SBA-backed loan guarantees.
“We look forward to continued dialogue with Treasury, the Federal Reserve and other policymakers on solutions to help small and franchised businesses do what they do best—create jobs,” Shay said.
Over the weekend, the White House Council of Economic Advisers published a report on small businesses. The study shows that nearly 96% of all employer firms in America have fewer than 50 employees. The numbers, provided by the Small Business Administration, show that the staggering number of firms with fewer than 50 employees have a share of 28% of the total employment of the nation.
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