Small Business Loan News: Stimulus Bill--Can We Now Get Loans in the New Secondary Market?
By: Sue Malone
The word is out that the new stimulus bill (American Recovery and Reinvestment Act of 2009) has a special provision creating a Federal government secondary market for SBA guaranteed loans. If you are a small business owner, will this loosen up any lender purse strings and allow some money to trickle down from the big cats on Wall Street and into your pockets? Yes, it is a good start, but hold your contagion because it is not as wildly exciting as you might think. In fact, some have openly criticized the new bill.
We begin by looking at a program that is already in existence and one in which SBA lenders are actually making loans: the Community Express Loan Program. This gives unsecured small business loans between $5,000 and $50,000 with very little paperwork, answers typically in two days, interest rates presently at 7.75%, funding and two weeks, and monies wired directly to your business account. Enter the Obama stimulus bill. Let us look how it affects this program and small business lending as a whole.
Some undiscerning headlines claim $3 billion in the stimulus bill is being pumped into the secondary market and viola, the banks will be making more loans. Not so fast. As this article explains, that money is being pumped into an elite SBA program that will not affect the average small business owner.
Before giving a clear answer, let's define what we are talking about. Most of us have heard about SBA loans. With the exception of disaster loans and the Microloan Program (for underserved communities), the Federal government through the U.S. Small Business Administration (SBA) does not actually loan the money. Instead, it licenses private lenders, like the community bank on your block, to make loans and if there is a default, Federal government guarantees come to the rescue and reimburse for a certain percentage. So, if you got a $100,000 loan (in this economy? OK, hypothetically) that has a 75% guarantee and there is a default, after going through certain steps, the lender could receive reimbursement for up to $75,000. And remember there are literally thousands of lenders out there that do SBA loans for the simple reason they feel warm and fuzzy with the guarantee.
Now here is how the secondary market works. In the good old days absent toxic reverse mortgages, banks held onto their loans and simply kept the in-house interest. But those days are long gone and banks now pool their loans and sell to investors on the secondary market which pays them a premium because of the expected enjoyment of future loan interest. They were packaged almost like mutual funds. Unfortunately, the secondary market is now a dry creek bed. I'm not handing out excuses for our banks, but this is one of the reasons they are not loaning.
But ask the average person on the street and a grimace creeps upon their face when they hear the name SBA loan: "Yeah, in whose lifetime? I would much prefer getting a loan while I'm still young." Visions pop into their heads of pounds of paperwork, endless regulations, untold delays, and layers of government red tape. But not so fast. The SBA also has excellent smaller loans which are truly "lean and mean".
So what does the new stimulus bill do? It got on an "A" for the idea but hardly passing with the follow through—it did not go nearly far enough. Under Section 503 of the new bill it has set up a secondary market for 504 loans only(to eliminate any confusion, the term "504" refers to a section under the old Small Business Investment Act, and not the current stimulus bill) which applies primarily to larger ventures seeking commercial loans for buying land and buildings. A private lender works in conjunction with a government Certified Development Company. Typically, the private lender makes a loan for 50% of the cost under a first mortgage (not guaranteed by the SBA) with 40% loaned by the CDC in a second position (100% SBA guarantee). The other 10% would be cash by the borrower.
So, if you are a trucking company that has worked hard and increased your number of trucks from 5, to 10, to 15, and years later to 100, you need to buy a new yard and warehouse (for less than truckload jobs). Cost--$4 million. You get a bank to loan under the 504 Program as a first position commercial mortgage. The SBA now has the authority to set up a SBA Secondary Market Guarantee Authority and give guarantees for pools of 504 loans to be sold to third party investors on the secondary market. The lender has to retain at least a 5% interest at risk. The SBA loan guarantees not more than $3 billion of such pooled mortgages.
If you like to read fine print, here is the exact wording:
SEC. 503. ESTABLISHMENT OF SBA SECONDARY MARKET GUARANTEE AUTHORITY. (a) PURPOSE- The purpose of this section is to provide the Administrator with the authority to establish the SBA Secondary Market Guarantee Authority within the SBA to provide a Federal guarantee for pools of first lien 504 loans that are to be sold to third-party investors. (b) DEFINITIONS- For purposes of this section: (1) The term `Administrator' means the Administrator of the Small Business Administration. (2) The term `first lien position 504 loan' means the first mortgage position, non-federally guaranteed loans made by private sector lenders made under title V of the Small Business Investment Act.
(2) GUARANTEE PROCESS- (A) The Administrator shall establish, by rule, a process in which private sector entities may apply to the Administration for a Federal guarantee on pools of first lien position 504 loans that are to be sold to third-party investors.
But there is a catch. In another article I stated the SBA is doing away with the borrower paying a loan guarantee fee, which can be thousands of dollars for larger loans. Unfortunately, for the secondary market on 504 loans, the SBA will charge a fee. Currently, these loans did not have an SBA guarantee:
(3) RESPONSIBILITIES- (A) The Administrator shall establish, by rule, a process in which private sector entities may apply to the SBA for a Federal guarantee on pools of first lien position 504 loans that are to be sold to third-party investors. (B) The rule under this section shall provide for a process for the Administrator to consider and make decisions regarding whether to extend a Federal guarantee referred to in clause (i). Such rule shall also provide that: (ii) The Administrator shall charge fees, upfront or annual, at a specified percentage of the loan amount that is at such a rate that the cost of the program under the Federal Credit Reform Act of 1990 (title V of the Congressional Budget and Impoundment Control Act of 1974; 2 U.S.C. 661) shall be equal to zero.
This secondary market program set up by the SBA will only last for two years under section 503 (f). Because this is emergency legislation, the SBA is to issue regulations within 15 days of the signing of the bill (503 (i)); amazingly quick for government purposes.
What about the secondary market on other loans? The typical everyday medium to large SBA loan is under the workhorse 7(a) program. For example, using the same trucking company, if they needed money to purchase more trucks, hire employees, or for general cash flow, they would seek a 7 (a) loan. The stimulus bill does not set up a new secondary market for 7(a) loans. But it does allow direct government loans (not made by private banks) to broker-dealers in the secondary market purchasing 7(a) loans. So if you are in the business of buying pooled 7 (a) loans and need a loan to do so, taxpayers monies will be used for this purpose. The idea is to stimulate this secondary market again so banks will make further loans.
But what about the small guy? Here the news is very disappointing. Studies show the average small businesses loan is $10,000. None of the stimulus programs helps the secondary market on the smaller loans and so few lenders are loaning.
But do not give up hope. There are still lenders out there, including those lending their own money, that are still making loans in the range of $5,000 to $50,000 unsecured at good rates, in the neighborhood of 7.75%. You just have to know where to look.