George S. May Business Blog

Small business owners get a boost today with new SBA lending rules

The Treasury Department announced that they will buy up $15 billion in securities. The move, backed by Small Business Administration loans, will be done in an effort to unfreeze the secondary market for SBA loans.

This will likely increase the amount of SBA loans to small businesses as it will enable the lenders to sell the existing loans on a secondary market, thereby freeing up money to hand out new loans.

The news of this secondary market came today from President Barack Obama as part of a larger effort increase the amount of SBA loans. This is much needed as lending through SBA’s flagship 7(a) business loan program is down a staggering 58 percent this fiscal year.

Small businesses are “not only job generators, but the heart of the American dream,” Obama said. Today, however, “too many entrepreneurs can’t access the capital” they need to start or grow their businesses.

“Less lending leads to fewer jobs and lower spending, which leads to less lending, a vicious cycle that delays recovery,” Obama said.

Obama also announced plans for implementing the SBA-related provisions included in the economic stimulus bill. Starting today, the SBA will guarantee up to 90 percent of each 7(a) loan made by private-sector lenders, an increase from the normal 75 percent to 85 percent guarantee. This higher guarantee is assumed to encourage lenders to make more SBA loans, as they will have more protection against possible loan losses.

A temporary elimination of upfront fees on 7(a) loans and 504 loans that lenders charge was announced as well. Borrowers or lenders who were charged any of these fees since Feb. 17, the day the economic stimulus bill was signed, will receive a refund.

The new initiatives will help community banks make more SBA loans, said Cynthia Blankenship, vice chairman of Bank of the West in Grapevine, Texas.

“This is an incredible tool for community banks nationwide to help jump start the economy and the credit markets,” Blankenship said.

Because of the frozen secondary market for SBA loans, her bank has been holding $11 million of these loans on its books. These loans now can be sold, freeing up money to make new loans.

Marco Lentini, who used an SBA loan to start his Gia’Pronto organic food restaurant six years ago, said the elimination of SBA loan fees and other measures in the stimulus bill, will help him keep expanding.

Treasury Secretary Timothy Geithner in a brief introductory speech, called on all banks, not just SBA lenders, to increase their lending to small businesses. The administration will require the 21 largest banks who have received government funds through the economic rescue package to report how much small business lending they do every month. All banks will have to report their total lending to small businesses every quarter, instead of just once a year.

“We need every bank in the country to do everything in their power to provide the credit that small businesses need to operate, expand and add jobs,” Geithner said. “You need to make the extra effort to make sure that good loans are getting to creditworthy small businesses in order to serve the larger public good of moving this nation towards recovery. And given the role many banks played in causing this crisis, you bear a special responsibility for helping America get out of it.”

The chair of the House Small Business Committee praised Obama for acting quickly to implement the SBA loan changes included in the economic stimulus legislation.

Acting SBA Administrator Daryl Hairston said the agency agrees with Obama that “we owe it to America’s small businesses to be the partner they need in the midst of this crisis.”

“We hope small businesses will take the opportunity to ask their banks about the SBA loans that might be available to them,” Hairston said. “And we encourage community banks and other lenders to work with us to reach as many qualified borrowers as we can during these difficult times.”

There is a defining statistic that was left out throughout all of this:

90 PERCENT OF BUSINESSES HAVE NEVER APPLIED FOR AN SBA LOAN. (according to a study for Discovery Financial Services)

Now, add the horrible state of this economy into the equation and I just don’t see too many more business jumping on board trying to borrow.

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