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Small Business Lending Drying Up
• Don't count on SBA-backed loans, at least for now
Friday,
July 31, 2009
The Small Business Office of Advocacy has recently released its report to the President and it isn’t very rosy. Small Business lending remains tight, and although SBA loan guarantees have increased, fewer local lenders are participating in SBA loan programs.
In Margate, SBA lending has slipped considerably from a total 25 SBA-backed loans in 2006 down 60 percent to 10 in 2008. The average amount of loans has increased, however, from $195,196 in 2006 to $432,620 in 2008.
As of June 2009 (six months into the year), only two Margate businesses have received SBA-backed loans totaling $825,000, according to www.sba.gov. In the first full quarter since Obama’s Recovery Act took effect, the SBA has backed 30 percent fewer small business loans than it did a year ago, reports CNNMoney.
Two popular SBA loan programs, the 7(a) loan and the ARC (America’s Recovery Capital) loan have become less attractive to banks for two reasons. First, many banks have said that despite a loan’s guarantee by the SBA, lending to small business in the current, volatile economic climate remains risky. Second, underwriting the loans holds up too much cash, because secondary markets have all but stopped buying the loans from banks, which primary lenders need in order to keep lending -- they need the ability to sell their loans to secondary markets.
What does it take to get an SBA loan?
Liquidity, liquidity, liquidity, a great marketing plan and at least three years in business. Sure, there’s SBA backed 7(a) loans available for start-ups, but most lenders require 50 percent down against the loan and enough liquidity to meet breakeven for at least a year.
The ARC loan (at between $35,000 and $50,000), which is designed to help small businesses with cash flow while they weather the recession, isn’t profitable for banks to underwrite, subsequently many lenders have shut their door on the program, including smaller community banks.
Small business lending will remain tight in 2009, according to “The Small Business Economy: A Report to the President.” Self-employment is down and unless concepts are extremely viable and business plans exhibit sustainability in year one, you’ll find local lenders shying away from SBA-backed loan programs – at least for now.
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