Obama plan to boost SBA lending faces potential hurdles
Business at Fresco Cafe North in Goleta is built on grilled chicken sandwiches, Gorgonzola-and-walnut salads and a $135,000 loan backed by the Small Business Administration.
Owner Indras Govender has had a triple helping of SBA loans since 1995, each used to serve up a new restaurant. In May, he and his wife, Tilly, got their latest from Community West Bank to transform their pizzeria into an eclectic lunch and dinner spot that features giant cupcakes and other desserts.
The loan was crucial to their dream of becoming the first licensed outpost of Santa Barbara’s Fresco Cafe, said Govender, whose restaurant employs about 33 workers.
“A lot of us wouldn’t qualify for a straight loan from a bank,” especially given the credit crunch during the last several months, he said.
Last week, the Obama administration said it would try to make it easier for borrowers to apply for SBA loans and for lenders to make the loans, which are guaranteed in part by the government.
Officials want to encourage recession-easing job growth by getting more SBA loans into the hands of small-business owners such as the Govenders, who doubled their workforce with their new cafe. Smoothing the way to more loans would help many small-business owners in Southern California, where a decline in SBA lending has mirrored a nationwide drop.
Just 1,164 SBA loans were made in eight Southern California counties in the five months that ended Feb. 29. That’s a 60% decline from the lending pace during the fiscal year that ended Sept. 30, based on average loans per month: 233 versus 579. The current loan rate is off 75% from 2007’s average of 934 loans a month.
The government has promised to spend as much as $15.4 billion to encourage banks to make, and borrowers to apply for, SBA loans.
As much as $15 billion of that will be spent by the Treasury to buy securities backed by pools of SBA loans sold by banks and other financial institutions.
An additional $375 million has been authorized for the SBA to take two temporary steps called for in the recent economic recovery bill:
* Reducing or dropping loan fees for borrowers and, when possible, lenders;
* Raising the guarantee on SBA loans to as much as 90%. Typically it is 75% to 85%.
Most analysts expect the moves to help but not solve the credit freeze afflicting small businesses.
For one thing, most small businesses don’t use the SBA-guaranteed loans that banks make. Although giants such as Nike Inc., Apple Inc. and Ben & Jerry’s Homemade Inc. reportedly took out SBA loans in their early days, SBA lending accounts for about 40% of long-term small-business loans and only about 10% of traditional small-business bank loans, said Tony Wilkinson, president of the National Assn. of Government Guaranteed Lenders, based in Stillwater, Okla.
In addition, potential borrowers and many banks have watched their creditworthiness drop in recent months. Borrowers may not be interested in or eligible for SBA loans under the tightened credit rules many lenders have rolled out -- guided in part by regulators.
Lenders might be willing to expand their SBA lending under the new 90% guarantee for so-called 7(a) loans, but the higher guarantee means they will owe higher SBA fees, Wilkinson said. Such loans are the most common type guaranteed by the SBA and are used to start, buy, run or operate a business.
Borrowers could fare better. If they can meet SBA loan criteria, they can save thousands of dollars under the plan to temporarily drop or reduce SBA fees. On a 7(a) loan for $300,000 with a 75% SBA guarantee, for example, a borrower can avoid $6,750 in fees. If the bank gets a 90% SBA guarantee, the borrower would avoid $8,100 in fees.
Fees for Section 504 SBA loans, often used for buying real estate, also will be temporarily dropped. Borrowers can avoid the 1.5% application fee, which on a typical loan of $600,000 would save them about $9,000. Lenders can also temporarily avoid fees in the program.
For more loan information geared to borrowers, go to the SBA’s website at www.sba.gov.
The Obama administration is making these moves in the hopes they will pump enough money through to the SBA lenders to allow them to make more SBA loans.
The plan the government announced last week, which comes on top of a $200-billion program to lend to investors who buy securities backed by SBA and other loans, is meant to thaw the so-called secondary market.
Despite the potential hurdles, “we are anticipating an increase” in SBA lending, Wilkinson said.
The once-robust market for securities backed by pools of SBA loans fueled the flow of funds in the past. Investors, including large foreign banks, were eager to buy the investment vehicles.
About 40% to 50% of loans made through the SBA’s 7(a) program were sold into the secondary market each year, Wilkinson said.
As investor demand has dried up amid the global financial crisis, banks and nonbank SBA lenders have been stuck with the SBA loans that they traditionally would have sold to get more money to lend. Typically they had sold the loans to broker-dealers who pooled them and created securities back by the pools.
Whether the government’s steps will result in a significant boost in SBA lending will depend in part on the fine print, market participants said.
The government hasn’t yet said how much it will pay for the SBA-backed securities, but some of the details revealed so far have turned off at least one major player in the secondary market.
The government has said it will require warrants from companies that assemble the pools and want to sell them to the government. The warrants, which are a type of security, would give the government the right to buy a company’s common stock at a set price. They have been used in fixed-income markets but have not been used in the SBA secondary market, participants said.
Poolers may also have to meet the government’s executive compensation provisions.
Those requirements “will likely prevent us from utilizing this program,” said Chris LaPorte, a principal at one of the largest broker-dealers in SBA loans, Coastal Securities Inc. in Houston.
LaPorte, an industry veteran, said he expected the market for SBA-backed securities eventually to recover on its own, but that could take a year or two.
The SBA estimates that there currently is about $3 billion or more in pooled 7(a) loans. Only pools set up on or after July 1, 2008, qualify for the government purchase program.
Coastal Securities has slowly started to buy loans again, LaPorte said, and has seen some interest on the part of other investors. The large foreign investors once hungry for SBA-backed loans are “kicking the tires,” he said, but not yet buying.
Restaurateur Govender hopes the credit freeze thaws soon.
“Small businesses,” he said, “are the nuts and bolts of the economy.”
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