SBA Loans Free Falling
SBA-backed loans for small businesses plunged some 57 percent in the last quarter of 2008 compared to the year before. That's even worse than the quarter before in which the number of loans to small businesses and franchise owners plunged over 30 percent.
Although disbursement of SBA loans are small when compared to conventional bank loans, they are an important part of stimulating small business expansion and the economy. These loans, called SBA 7(a) loans, are guaranteed by the federal government to lending institutions in case small business borrowers fail to pay them.
Bob Coleman, an SBA analyst and head of Coleman Publishing, a trade journal that tracks lending news, observes why such a deep plunge does not bode well for small business owners. Coleman declares, "It's not a coincidence the unemployment rate is rising as small business lending is falling. The $700 billion Wall Street bail out must trickle down to Main Street. SBA, with all its warts, is the most cost effective way for the American taxpayer to get capital to Main Street."
Experts weigh in on the problems behind the collapse of lenders providing SBA loans:
Problem #1: The TARP associated costs make SBA loans have too little profit to interest lenders. Tom Mueller, director of Small Business Administration’s Columbus division, told television station nbc4i that those TARP loans that Hank Paulson dished out to save Wall Street are in fact handcuffing lenders from loaning out TARP money to small businesses. “The banks really can’t make money on those funds,“ Mueller said.
Under Small Business Administration rules on a standard 7(a) loan, lenders can charge the prime lending rate, currently 3.25 percent, plus an additional 2.75 percent. This means that lenders are limited to charging 6 percent interest on an SBA loan. But the lenders owe the federal government 5 percent on any TARP money they borrow and they pay just over half a percent in feeds to the SBA. That leaves less than half a percent balance, not including the risks and servicing costs associated with loaning money in a bad economy.
“They can’t earn anything basically off that 5 percent that they’re paying,“ Mueller said. Lenders charge higher interest rates if they want, without SBA loan protection."
Lenders complain that there is risk and effort when it comes to SBA loans that need to be compensated. The paperwork is considerable and that if forms are incomplete or incorrect, it is possible that the failed loans won't be reimbursed by the SBA.
Problem #2: The SBAExpress bubble that helped prop up the number of loan disbursements has burst. In his blog, Inc.com reporter Robb Mandelbaum's explains:
"the biggest drop in 7(a) lending occurred among -- wait for it -- SBAExpress loans, for which banks use their own forms and credit scoring models to decide independently -- and immediately -- whether to approve the loan. (In exchange for delegating that authority, the SBA offers only a 50 percent guaranty.) Express loans are down a whopping 64 percent. . . Express loans were an easy way for the SBA to bulk up loan numbers -- or reach more borrowers, to construe it more charitably -- at little cost to the agency. (The bank, after all, is doing all the work.) In 2006, these amounted to two-thirds of all 7(a) loans. But they are, evidently, the least resilient to a softening economy. As banks tighten credit scores, Express loans are the first to go. By comparison, regular 7(a) loans --with their reams of paperwork and SBA approvals -- fell just 32 percent."
Problem #3: The secondary market that packages the SBA loans and sells them has frozen. SBA loans have been attractive to banks because their is a secondary market broker who immediately buys these loans and resells them, minimizing the lending risk to banks. But that's now broken. Mandebaum once again explains:
"The SBA, for its part, blames the frozen secondary 7(a) market. (Many banks, especially community banks, pool their 7(a) loans and sell them to investors, reinvesting the proceeds in new loans.) SBA spokesman Mike Stamler says that recent initiatives to shore up the secondary market by both the SBA and the Treasury Department "will help free up the capital both brokers and investors need to purchase new SBA loans." As these changes work their way into the system, "we expect secondary market activity to begin to return to normal levels."
Problem #4: Demand by entrepreneurs has substantially declined. CNNMoney reports, "Owners tell us that their primary concern is terrible sales. Under those circumstances, why would they want to expand? They just aren't doing that right now," said William Dennis, a senior research fellow with the National Federation of Independent Businesses, a Washington trade group.
Problem #5: Sales people for loans are being let go in droves. Bob Coleman explains in Inc.com, saying, "A real problem is that banks are firing their sales people left and right -- I estimate the SBA lending industry has lost 1,500 private sector jobs in the last three months," says Coleman. "Coupled with shrinking credit boxes, SBA lending has simply plummeted."
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