U.S. Small Business Administration

President Obama unveiled his Administration’s plans to boost lending to small businesses. The plan includes having the U.S. Small Business Administration:

 Temporarily raise guarantees to up to 90 percent on SBA’s 7(a) loan program, through calendar year 2009, or until the funds are exhausted. This increase in guarantee levels will help provide banks with the greater confidence they need to extend credit during the current recession, will mean more capital available to small business owners around the country.

 Temporarily eliminate fees for borrowers on SBA 7(a) loans and for both borrowers and lenders on 504 Certified Development Company loans, through calendar year 2009, or until the funds are exhausted. This will mean more capital available to small businesses at a lower cost. The fee elimination is retroactive to February 17, the day the Recovery Act was signed. SBA is developing a mechanism for refunding fees paid on loans since then.

 Additionally, the President announced today that the Treasury Department will commit up to $15 billion to help unlock the frozen credit markets by purchasing small business loan securities currently frozen on the secondary market. By purchasing these securities, it will unlock these secondary markets, and in turn, free up more capital to jumpstart lending for small business owners. The SBA has worked closely with the Treasury Department to address the need to unlock these secondary markets for SBA loans.

Oh, the best laid plans.

Do you know what James Sanders, James Abdnor, Susan Engeleiter, Pat Saiki, Erskine Bowles, Philip Lader, Aida Alvarez, Hector Barreto, Steven Preston, and probably Karen Mills have in common. They have all had the title of Administrator, U.S. Small Business Administration since I started to get active with SBA loan programs 23 years ago. Ten Administrators over a 23 year period; that equates to an average tenure of 2.3 years.

When I first got involved in SBA 7(a) lending in 1986 the SBA provided a 90% guarantee and the loans were very saleable on an active secondary market at significant premiums above par value. I could originate a 25 year real estate loan, using the 7(a) loan program, and sell the loan for 10% above par value on the secondary market. Why wouldn’t a lender do this all day long? Loan money, obtain the government’s 90% guarantee, get fee income of 10% of the loan amount, and, if the loan went into default, get your entire at risk principal back through exercise of the guarantee! This type of program isn’t too good to be true, it existed, but lacked participation.

Some of the reasons participation in the 7(a) loan program have been less than stellar over the last two decades that I’ve been involved with it is because:

1. Paperwork is required to submit an SBA Loan Package to a bank and then for the bank to submit its guarantee request to the SBA. Lenders shun doing this paperwork.
2. The SBA is a bureaucracy. Once they receive the correctly completed forms from a lender requesting its guarantee, they often do not turn around the information in a timely manner. Worse yet, if a form is missing some information, the entire package is held up until the form is properly completed.
3. It takes a bank just as long to underwrite a $5,000,000 loan request as it does to underwrite a $500,000 request; however, the profit to the bank is 10 times greater. Therefore, although banks like to say they loan money to small businesses, small businesses are the lifeblood of the economy, and many other platitudes, the fact of the matter is that there is more profitability for a bank to loan on a larger scale than to loan funds to small businesses. This is evident in how small business departments at banks are staffed, and how there is a lack of prestige being in a small business department at a bank.

Today’s actions by President Obama make reasonably good press. However, based on my 23 years of historical experience in working with the SBA and seeing how the process really works for borrowers, banks, and the SBA, I’m guessing that all we really saw today is some additional bureaucracy in action and no real results will be produced from these actions.

As a final note, although most lenders did not see the benefits in the 7(a) program that I illustrated above, the company I worked for and some other non bank lenders clearly saw how we were able to assist small businesses with much needed capital, as well as how we were able to profit. Although the paperwork was cumbersome, it was easy to automate and master; and, once I developed an exemplary relationship with peers at the SBA the process of originating SBA loans was very gratifying. Therefore, while history tells me today’s action by the President will not benefit business, I have always been a believer in the SBA 7(a) loan program and hope that its newest Administrator, should she ever actually get appointed, will help promote this valuable endeavor too.

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