SBA's Stimulus Lending is Tainted by Political Meddling

I tried to make my tweets coherent and meaningful. So I watched the more experienced Twitter practitioners tweet information about small-business lending, the U.S. Small Business Administration and the importance of forming relationships with bankers.

Small-business owners, bankers and journalists attended the virtual gathering called, "Intuit Money Matters Town Hall Series." Our objective was to help each other understand what it takes for small businesses to snag the funding they need to survive the downturn and thrive as the economy improves.

The group agreed that forming a relationship with your banker is imperative.

"Even if a loan/line of credit isn't needed right now, who knows what may happen down the road? Form the relationship now," Stacy Kildal tweeted in 120 characters, staying within the 140-character limitation allowed by Twitter. She is the owner of Advanced QB ProAdvisor.

Phil Bryan, with Massachusetts-based Metro Credit Union responded in 118 characters, "Relationships still play a big role. If you always pay your CU 1st they are more likely to stand by you in tough times."

The pace picked up and I bumbled in with, "Start banking relationship with a depost and daily schoozing -- no mail in deposting."

How embarrassing!

I entered the thread with a bunch of hurried and misspelled gibberish. What I meant to write is you should open a small checking or savings account as a way to start your banking relationship. Furthermore, instead of making deposits into the drive-through window, go inside to schmooze with banking officers.

In most cases you should seek out banks that make lots of SBA's basic 7(a) loans. Community Banks are the best small-business lenders and their presidents are accessible. He or she is visible behind a glass partition or on the banking floor helping the tellers and customers.

So introduce yourself and form a relationship. Get an introduction to the chief loan-officer and find out how the loan committee makes its decisions. Ask how business loans are underwritten, what collateral is required and learn about the credit qualifications you need to pass muster.

Back at the Twitter meeting, Gordon Gerwig, a California-based SBA lender said, "Cash flow to service debt is a must, great collateral won't make up for lack of cash flow in the SBA world."

He was referring to the business's net income available to make debt service payments.

Lenders want to see adequate cash flow to make the loan payments with a cushion left over in case your sales are lower or expenses higher than projected. A minimum cushion of 25 percent is typical.

The Twitter participants discussed SBA's "America's Recovery Capital Loan Program," known as "ARC." It is a temporary rescue loan for struggling businesses with cash flow problems.

Viable businesses can borrow up to $35,000 to make their existing loan payments and reduce their debt, including for credit cards and capital leases. What is more, SBA pays all the interest and loans fees. Borrowers' principal payments begin 12 months later.

But most banks refuse to participate. Some lenders reserve ARC for their existing borrowers.

A venture capitalist from Miami Beach, Fla. tweeted, "Not seeing ARC for non-clients; not seeing ARC for deposit-only clients; only for existing clients with same-bank debt".

On my promise of anonymity, a regional SBA official told me that the agency had not been adequately prepared to launch ARC. He says, "No time was allowed to work out any kinks before it was launched agency wide."

In other words, the few banks that make ARC loans are trying to save their own defaulting borrowers. One exception is Wachovia Bank. It is accepting applications from everyone through its ARC loan center in California. Call 1-800-877-1722 to get your application.

Responding to their constituents, politicians with half-baked ideas pressured SBA to launch small-business rescue loans. The result is a flawed ARC program. On my promise of anonymity, an official with SBA told me that the agency had not been adequately prepared to launch ARC. He said, "No time was allowed to work out any kinks before it was launched agency wide."

On the other hand, SBA's stalwart program, basic 7(a), by 50 percent from last quarter. In part it is because the agency temporarily increased its loan guarantee to 90 percent from 75 percent and eliminated most of the borrower's fees. As a result community-banks are beginning to lend again. The maximum 7(a) loan is $2 million.

Additionally, the credit markets are improving and the banks can sell the guaranteed portion of their SBA loans at premiums closer to what they got before the financial meltdown.

Better still, the higher guaranty provides them with additional leverage. As a result, they book more immediate-income than they did in good times.

For more information about SBA's stimulus initiatives, go to sba.gov/recovery/index.html.

Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner, tenonline.org/sref/jc1bio.html. He is a former entrepreneur, commercial mortgage banker and business lender.

Follow Jerry Chautin on Twitter: www.twitter.com/JerryChautin

Comments

[anonabc]

The SBA ARC program is a joke PR stunt and just more of the Big Con:

Banks plead poverty, then use our tax money to pay themselves million dollar bonuses while refusing to provide the loans the money was supposed to go towards.

As a software business owner I long ago concluded that these loan programs are a waste of time & money to chase - both of which are much better spent instead to generate new sales & revenue.

The entrepreneurial ecosystem of this (formerly) great country is now fundamentally broken, and I doubt it will ever recover.

[ibodner]

Reading these comments is more painful than the article itself! So many of us are in rough waters, and so many more are simply out of business. The SBA is not a viable option, no matter what anyone says - loans are tough, very tough, to get. It is my opinion that people need to focus on alternative financing and save their energy on running their businesses.

Sincerely,

Ilya Bodner
Small Business Owner
Initial Underwriting Group

[Jerry Chautin - Huffpost Blogger]

40 percent of SBA loans are sold into the secondary market. That makes it real difficult to alter the terms. For those that are still in a lenders portfolio, SBA wants them to temporarily work out a relaxed payment schedule. The key is finding out if its a portfolio loan or its been sold. Several of my SCORE clients have been able to work it out with their lenders.

Jerry Chautin

[nealgordon]

The SBA ARC Loan program is a little over a month old and the reality of the program is disappointing. Those few banks that are participating have set policies which are much narrower that the guidelines allow. Only a handful of banks are accepting applicants who are not current customers, usually defined as a current borrower from the bank. Worse yet, there are almost no lenders are accepting Credit Card debt, Lines of Credit debt or home equity debt as the qualifying debt that they will make the loans for. If they will consider those, there are further restrictions that essentially eliminate them.

It is more apparent than ever that, as we try to help borrowers with the application process, the bottom line on this ill-conceived program is that it is TOO NARROW, TOO LITTLE AND TOO LATE. Congress designed the legislation and the President signed it...Now will they FIX IT???

Neal Gordon
www.BusinessBorrowersAlliance.org

[Jerry Chautin - Huffpost Blogger]

You've got it right, Neal. The basic SBA 7(a) and 504 loans are working at the community bank level. BofA and several prolific large banks have headed for the hills and stopped making small business loans. But the market is improving for those that can hang in there.

Thanks for your comments.

Jerry Chautin

[skyshoes]

I have been trying for three years to "renegotiate" a loan I have with the SBA to fit current economic realities. I have been lied to, mislead and put off by SBA'ers who have no clue (or want to be clued in) as to what is going on in the real world. Finally after pinning one gal down who "wanted to get it off her desk" I was screamed at. "The SBA does not re-amortize LOANS!"

"No time was allowed to work out any kinks before it was launched agency wide." Give me a break.

There is no leadership. All efforts have been expended towards Wall Street, little or none towards its victims. Huggin' up with Sarkozy and Medelev won't get the job done. Obama needs to de elite and check out the street.

[nealgordon]

One of the services of our firm has been helping businesses with SBA Loans try to modify, restructure and re-amorize their loans. As Jerry points out, loans that were sold into the secondary market, have very few options available...unless we can start to get the SBA to buy the whole loan and be a partner in the restructuring...a highly unlikely scenario.

What has developed is that SBA lenders have been told many times about their "unilateral authority", the "rules" of what they could do and not do with an SBA loan, including converting 10 year terms to 20 or adjusting interest rates. It has become a matter of what they will or won't do, and most banks have a policy of "do nothing and get the guarantee" if the borrower goes under. Very few banks want to take any risk that they think could injure the guarantee that they have. It is a real CYA philosophy.

Wonder what will happen if ARC Loans start to go sideways, like the IG has predicted?

Neal Gordon
www.BusinessBorrowersAlliance.org