[OP-ED] INDIANAPOLIS, Ind. — The American Recovery and Reinvestment Act (Recovery Act) and Department of Treasury actions hold potential for helping solve our small business credit crunch by offering incentives to lenders to provide capital to small businesses, and by reducing the cost of borrowing for small businesses.
The U.S. Small Business Administration (SBA) guarantees loans that are made to small businesses by lending institutions such as banks and credit unions. Upon request by a financial institution, the U.S. Small Business Administration can assume a major portion of the risk of lending to a small business. This is an incentive for the lender to make loans; particularly to start-up businesses and businesses in new industries.
The Recovery Act provides SBA with $730 million in total funding. This includes $375 million to cover the costs of temporarily eliminating loan fees for borrowers and raising guaranty limits on some loans; providing extra funding for SBA-backed Microlenders; and targeting $255 million for a new loan program that is being developed to help viable small businesses with immediate economic hardship make payments on existing loans.
For SBA lenders, the Recovery Act supports guarantees of up to 90 percent on most types of SBA 7(a) loans to qualified small businesses. SBA 7(a) loans can be used for a wide variety of business purposes. With a 90 percent guaranty on a $100,000 loan, for example, the financial institution will be at risk for only $10,000. This level of risk-sharing will be a substantial incentive for a financial institution to make capital available for small businesses.
Prior to our economic downturn, many of the loans guaranteed by SBA were pooled and sold to investors on the secondary market. This mechanism placed more capital into the marketplace for additional lending. In the past several months; however, this secondary market has stalled. To further assist SBA lenders, particularly smaller community banks and credit unions, the Treasury Department will commit up to $15 billion in TARP funds to help unfreeze the market. The Treasury will use the TARP funds to purchase existing and new SBA-backed loans made by our lenders. This is viewed as a major step toward increasing the opportunity for SBA-backed lending to our small businesses.
Another SBA program is the 504 Certified Development Company Loan Program (504). This program is used to finance purchase or construction of a building or for purchase of long-lived, major equipment. A change to the 504 program under the Recovery Act is its use to refinance existing fixed asset loans as part of a business expansion project. As further incentive for lenders, the Recovery Act temporarily eliminates 504 loan fees they had been paying. The Recovery Act also authorizes SBA to use its guaranty authority to establish a secondary market for bank loans made under the 504 loan program; and to make loans to broker-dealers who buy SBA-backed loans from lenders and pool them for sale to investors on the secondary loan market.
The Recovery Act enables immediate savings for small business borrowers. Prior to the Recovery Act, loans with an SBA guaranty had an upfront fee charged to the borrower. Money collected from the upfront fee had been pooled and used to help pay the guaranteed portion of the loan to the lender if a small business defaulted on a loan. Elimination of the borrower loan fee under the Recovery Act represents a substantial savings to the small business. For instance, if a small business borrowed $100,000 from a bank under the SBA 7(a) guaranty program, the upfront loan fee would have been $1,700.
With the help of our resource partners: SCORE, the Indiana Small Business Development Center Network, and the Women’s Business Centers; the SBA Indiana District Office can assist Indiana entrepreneurs with their business planning, assist with preparations for seeking financing, and help analyze strategies and techniques that will guide the business through challenges and for planned growth.
The temporary loan fee eliminations and 90 percent guarantee provisions will apply to approximately $8.7 billion in 7(a) guaranteed loans and $3.6 billion in 504 loans across the country. SBA estimates that its allotment from the Recovery Act will cover lending in both programs through calendar year 2009.
While it is a challenging time for prospective and current business owners, our Indiana entrepreneurial spirit will help us rebuild our economy. The American Recovery and Reinvention Act of 2009 holds opportunities for re-starting lending and promoting investment in our nation’s small businesses. Now is the time to take advantage of the many elements in the Recovery Act. Contact SBA at 317/226-7272 or www.sba.gov/in for more information and assistance.