08/21/2009 05:12 am ET Updated May 25, 2011

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

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 and business lender.