Once upon a time, the U.S. Small Business Administration made direct loans to socially and economically disadvantaged small-business people. The SBA's direct lending programs also targeted disabled veterans and others that politicians said deserved preferential treatment.
What's more, the agency required applicants to get turned down by two banks as a prerequisite to applying for its loans. The paperwork was voluminous, and it took many, gut-wrenching months to get a deal done.
That was during the 1960s and '70s, and yet the myths persist. With the exception of disaster lending, SBA has morphed into a loan grantor to mitigate some of the risk for its banks. The lenders underwrite the loans and make the credit decisions without the government imposing underwriting leniency for disadvantaged applicants. The timeline from application to closing is not much longer than for a conventional business loans.
"The paperwork is actually not very much," Karen Mills, the SBA's administrator said, during an in the interview for a March 27 article in the New York Times.
"Our turnaround time for loans is 10 days." When delays do occur, it is often because the borrower is having difficulty assembling financial statements and other documentation requested by the lender. "Banks are working with mostly their own documents" for SBA loans, Mills added. "Our role is to provide access and opportunity."
As a hypothetical example, she cited, "The bank says the last two years have been a little tough, you don't quite meet my standards." But rather than turning down an existing or prospective client, "that's when they use the SBA guarantee," Mills explained.
The SBA was there to give banks the comfort they needed to begin lending again when they were recovering from the Great Recession, according to a Feb. 3 column in Forbes Magazine. The agency was front and center as an important part of the Obama administration's $1 trillion Recovery Act.
The legislation temporarily increased the loan guarantee on SBA 7(a) loans to 90 percent from its typical 75 percent. As a result, lenders made more loans, and in some cases, accepted borrowers with lower credit scores, less cash invested and softer collateral than they would have approved otherwise.
Newtek Small Business Finance, a non-bank, SBA lender, contributed the column to Forbes. "We believe that there are approximately $60 billion in outstanding balance of 7(a) loans," the column said. "The funds are invaluable to small businesses that receive long term (7-25 year amortizing loans) with fair interest rates."
The SBA's 7(a) program, for example, provides up to $5 million in working capital, equipment financing, acquisition funds to buy a business and real estate financing for owner-occupied buildings. That includes hotels and motels, daycare centers, manufacturing businesses, service businesses and most types of businesses.
And yet, some legislative ideologues and conservative groups would rather abolish the agency than spend taxpayers' money to boost its small business loan-guarantee programs. The programs put the full faith and credit of the federal government in loans that would otherwise not have been made. In many cases the non-chain, neighborhood restaurant, dry-cleaner, and even the McDonald Fast-food franchise that we have all come accustom to patronizing, would not exist. Furthermore, these businesses create jobs and stimulate the lackluster economy.
One more myth needs to be laid to rest. The SBA does not give grants to small-business owners. An exception is for technical research and development. The SBA's Small Business Innovation Research and Small Business Technology Transfer Research Programs offer grants directly to qualifying small businesses.
SBA also gives grants and low interests loans to its licensed microlenders. In turn, the microlenders, such as Asheville, North Carolina-based Mountain BizWorks, makes small-business loans from $5,000 to $50,000. "The amount of money microlenders have to lend went from around $120 million in 2008 to $340 million now," Mills says. "They provide an enormous amount of technical assistance," in addition to making loans.
In my opinion, some of SBA's programs should be reformed or eventually phased out. But its lending programs are an essential part of our economy. Because without SBA, small-business ownership would founder.
Jerry Chautin is a volunteer SCORE business mentor, business and real estate columnist, blogger 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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