In June, Small-business loans guaranteed by the U.S. Small Business Administration, plummeted, plunged, nose-dived and crashed according to headlines in the media. More specifically, June's volume was down by about two-thirds compared to May -- dropping to $647 million from $1.9 billion.
Some bankers attribute it to Congress' failure to extend the stimulus package that uses taxpayers' money to eliminate loan fees charged by the agency. It should be noted however, that borrowers are allowed to add the fees to the loan amount so that they are paid out of the loan proceeds, not out of their pockets. In that way, it may not be as much of a disincentive for borrowers in need of capital to accept the deal.
But a greater deterrent for the banks is that the stimulus also increased SBA's guaranty to 90 percent from 75 percent. That is because many of the smaller community banks, the most prolific SBA lenders, sell the guaranteed portion. In turn, the buyers pay the banks premiums that are immediately booked as income.
In today's market, it is possible for a lender to get a premium of 10-percent of the sold portion. Thus, the reduced guarantee reduces the lender's profit.
For example, on a $1 million loan, the guaranteed portion was $900,000 when SBA's guarantee was 90 percent during the stimulus. At a 10-percent premium, the lender got $90,000 immediate income.
But the stimulus has not been renewed and the guarantee is back at 75 percent. Therefore, only $750,000 is guaranteed and a 10-percent premium gives the lender $75,000 --- $15,000 less profit. Less profit means the lender is willing to take less risk and will likely reject the more marginal applications. That is why SBA's loan volume has tanked.
Yet, amidst the foreboding headlines, there is a not-so-noticeable success story for small-business borrowers needing small amounts of capital. More specifically, SBA's Community Express Program continues to chug along at a brisk pace.
In fact, one of the participating lenders is increasing its volume by getting referrals from Sam's Club, Walmart's discount warehouse. "We have received over 2,000 loan requests in one week (from Sam's)," says Tim Jochner, CEO and co-founder of Walnut Creek, Calif.-based Superior Financial Group. "So far the loan demand has even exceeded our expectations."
Community Express is a pilot program that continues to evolve and is not affected by Congress' hesitation to extend the stimulus package. The 85 percent, SBA-guaranteed loans are from $5,000 to $25,000 and made without collateral.
Amounts can be increased to $50,000 in low-to-moderate income areas, historically underutilized business zones and other SBA designated areas. SFG limits its loans to $25,000 but some other Community Express lenders will go up to $50,000.
Most SBA lenders will not make Community Express loans because they have a minimum loan requirement of $100,000 and go up to $2 million -- the maximum permitted under the agency's 7(a) program. They say that it cost too much to originate, fully underwrite and process loans in amounts less than $100,000.
By contrast, Community Express lenders rely heavily on credit scoring with minimal documentation. That keeps their processing cost low and approval time to about one week.
Community Express applicants are primarily start-up entrepreneurs. Jochner says, however, many referrals from Sam's Club are already in business and, therefore, a better risk. Moreover, the ones approved have higher credit scores than SFG's average borrower.
"Sam's Club membership is well diversified and affords us a great opportunity to reach these hard to reach businesses that remain underserved," he says.
Even so, the benchmarks for approval are the same for all applicants, regardless of who initiates the application. "Underwriting is the same, but we are utilizing SBA's only programs that specifically targets the underserved, minority women and veterans."
The program is all-inclusive and non-targeted groups are welcome too.
SFG is also a leading lender for SBA's Patriot Express loans. As with Community Express, SFG currently limits its Patriot Express loans to $25,000 even though the program's maximum is $500,000. It targets veterans, solders transitioning out of service, and their spouses. Most SBA lenders make Patriot Express loans and go up to $500,000.
Panama City Beach, Fla.-based Borrego Express Capital also makes Community Express and Patriot Express loans nationwide. But they are not originating loans through retail stores.
"Rather than try to push through a retailer, we are working on outreach to the local banking communities in addition to our normal TA Providers," says Terry Crispen, Borrego's executive vice president.
SCORE, small business development centers and several other nonprofit organizations are among the approved technical assistance providers that mentor Community Express borrowers. Mentoring prior to funding is a program requirement. It should not, however, delay approval or getting the loan proceeds wired into to the borrower's bank account.
Borrego and SFG are the only SBA lenders that make very small, Community Express, Patriot Express and Export Express loans nationwide. You can compare their programs, find contact information and download an application at their web sites.
SBA can tell you if there are additional participating lenders in your location. Contact the agency by phone or e-mail; 1-800-U-ASK-SBA (1-800-827-5722) or firstname.lastname@example.org.
Sam's Club was invited to comment for this article but did not reply to e-mails.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin
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