Crunch Dries Up Funds for SBA Loans : Financing: A 35% jump in applications over last year is cited. The problem may resurface in early ’93 unless Congress takes action.
A guaranteed-loan program operated by the Small Business Administration is expected to run out of funds today, temporarily drying up a key source of financing for tens of thousands of fledgling businesses adversely affected by the ongoing credit crunch.
The avalanche of guaranteed-loan requests this fall so far exceeds last year’s pace that the SBA has reached the limit of its underwriting capability for the October-December quarter and will not be able to issue new loan guarantees until after Jan. 1.
Even then, however, the shortfall is expected to resurface within weeks unless Congress boosts funding for the program, industry officials say. Congress last year authorized the agency to dip into other underused accounts to fund the loan guarantee program.
Demand for SBA-backed loans reached a record $5.6 billion during the 1992 fiscal year ended Sept. 30, an increase of more than 35% over 1991. Turned down by banks and other providers of traditional loans, about 22,400 entrepreneurs sought SBA loan guarantees, each of which costs taxpayers about a nickel per dollar of loan amount.
“This is the first year we have faced a crisis of this magnitude,” SBA spokesman Michael Stamler said. “We will have to hold on to applications and attempt to fund the backlog starting in January.”
In past years, the SBA sometimes ran out of money with a few days left in the fiscal year, but the shortfall had no noticeable effect on borrowers. This year, however, Congress for the first time required the agency to budget its loan guarantees quarterly rather than on a fiscal-year basis, Stamler explained, setting the stage for the first-quarter crunch.
“This will cause significant problems,” said Tony Wilkinson, president of the National Assn. of Government Guaranteed Lenders, a nonprofit group of banks and other lending institutions active in SBA lending programs.
“People keep saying that small business is going to lead us out of the economic doldrums,” Wilkinson said. “Well, they’re going to need capital to do it.”
The agency’s lending shortfall is all the more significant because SBA-backed financing has been the only source of long-term funding for many small businesses during what is widely perceived as a nationwide credit crunch.
Robert Palmer, vice president of Recycler Core Co. in Buena Park, was told last week that it would be at least two months before the SBA could act on the company’s application for a $1-million loan from the National Bank of California.
Palmer said his company, which deals in used auto parts, needs the money to purchase a new building so that it can expand its 50-person staff next year by 12% and move from its current cramped quarters, where the landlord is seeking a 25% rent increase.
“We are a pretty strong company, and the amount we would pay in a mortgage wouldn’t be any much more than we are paying in rent now,” Palmer said. Yet, he added, “every lender we’ve approached” has turned down the firm’s loan request.
The situation for small businesses could grow worse next year, when banks and thrifts will be forced to make new public disclosures of the fair market value of their assets, including securities and real estate.
The change in rules will force banks and thrifts to set aside even more money for projected losses on bad loans, limiting further their ability to finance small- and medium-sized businesses. That, in turn, may force even more small businesses to seek SBA-guaranteed loans--which means that only the strongest small companies are likely to get loans.
“Too many people on the borrowers’ side are competing for too few funds,” warned G. Larry Engel, chairman of the American Bar Assn.’s task force on causes of the credit crunch. “What ends up happening is that the best companies from a lending standpoint are competing for these SBA dollars, squeezing out the neediest borrowers.”
