Lending a Helping Hand

The American Recovery and Reinvestment Act of 2009 brings positive changes for Small Business Administration lending.


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When President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 in mid-February, the stimulus bill brought about several positive changes for Small Business Administration (SBA) lending programs. Totaling $730 million in new expenditures, these revisions are making it easier for small businesses to borrow money as the economy continues to sputter.

Eric Zarnikow is the SBA’s associate administrator for capital access. He says that the agency plays an important role in helping small businesses access capital. “One of our main missions is to expand access to capital for small businesses, making it easier to get loans, to start, or expand, or grow a small business,” explains Zarnikow in a recent interview about the American Recovery and Reinvestment Act. “And our role really is to expand the amount of capital that is available to small businesses by taking some of the risk away from the banks through a partial government guarantee.”

The SBA offers three major loan programs: Micro Loans, 7(a) Guaranteed Loans and 504 Loans (on a smaller scale the agency also offers two other programs: Disaster Recovery and Special Purpose Loans). With the Micro Loan program, funds are made available to non-profit intermediaries, who in turn extend financing to local small businesses.  Loan amounts range from $100 to $35,000 with the average size being $13,000. The intermediaries, located throughout the country, also provide management and technical assistance.

The 7(a) Guaranteed Loan program is the SBA’s primary business loan program. Loans are made directly to businesses by participating lending institutions, with the SBA providing a partial guaranty of collection to the bank. Included in this lending initiative are the Express Loan program for loans under $350,000 and the standard 7(a) program for loans up to $2 million.

Targeted at providing long-term fixed rate financing for assets such as real estate and equipment and machinery, the 504 Loan Program involves three parties: the borrower, the bank and a Certified Development Corporation (CDC). A Typical 504 project includes: 1) a loan extended by a commercial bank with a first lien on the asset financed; 2) a second lien loan secured from a CDC with a 100 percent SBA-guaranteed debenture for up to 40 percent of the total cost; and 3) an equity investment of at least 10 percent from the borrower. The maximum SBA debenture is $4 million, which means the total project can be as high as $10 million.

For 2009, the SBA has appropriated over $28 billion for its various lending programs, and there is plenty still available for qualifying pet retailers. And SBA loans often are made to those businesses that otherwise have difficulty accessing conventional credit markets. In fiscal 2008, 35 percent of SBA loans were to start-up businesses, 32 percent were to minority owned businesses, and nearly 23 percent were extended to women-owned ventures.  

Of the nine components of the Recovery Act that address SBA lending, there are six that will have the greatest impact on pet businesses in need of financing.


1. Temporary Elimination of Loan Fees

Of the $730 million set aside in the bill for the SBA, most of the funding ($375 million) is targeted for the temporary elimination of loan fees for small businesses on 7(a) and 504 loans, and for lenders on 504 loans. While 7(a) guarantee fees vary slightly based on loan amount, the typical fee charged is three percent of the guarantee amount. So, for a $500,000 loan with a 90-percent guarantee, the up-front fee that will be waived is $13,500. This portion of the bill will provide a significant savings for those cash-strapped pet store owners in need of financing.


2. Temporary 90 Percent Guarantees for 7(a) Loans
Prior to the bill’s passing, the maximum guarantee allowed for 7(a) loans was 85 percent for loans of $150,000 or less, and 75 percent for loans in excess of this amount. While the 15-percent increase may not sound like much, it is a significant enhancement for lenders when viewed on the margin. For example, under the old rules, the maximum guarantee level for a $500,000 loan was $375,000. This required the bank to take $125,000 in risk. With the increase to 90 percent, the guarantee level increases to $450,000, with the bank’s risk level limited to only $50,000.

Having spent over 25 years in the field of commercial lending, I can attest that this level of guarantee will make a big difference in the willingness of banks to extend SBA-guaranteed loans. Of course, this is exactly the intent of this component of the bill.

“The 90-percent guarantee means that you are more likely to get the loan,” states Zarnikow. “In today’s environment, there’s a lot of concern by banks about taking risk. The economy’s in a recession. Times are tougher. We’ve seen that banks have tightened credit standards. But by providing a 90-percent guarantee, it reduces the risk that the lender is taking and makes it more likely that they’ll make the loan. So, it’s providing additional access to capital for small businesses.” 


3. Expanded Micro Loans
As mentioned above, Micro Loans are backed by the SBA and extended directly to small business owners by local non-profit intermediaries. The Recovery Act bill includes $50 million in additional funding for new SBA Micro Loans. These loans can be used for most business purposes, and the maximum term allowed is six years. Rates vary and generally run between eight percent and 13 percent, still significantly lower than most small business credit card rates. To find a participating intermediary in your area, check out the list available on the SBA website (www.sba.gov). 


4. America’s Recovery Capital Stabilization Loans
The second largest component of the bill, in terms of dollars ($255 million), is the America’s Recovery Capital (ARC) loan program. This program is designed to help struggling small businesses cover loan payments on existing, qualifying loans (not just SBA-guaranteed loans) for up to six months. Loans will be made by banks, and the small business can borrow up to $35,000 with the loan backed 100 percent by the SBA. Repayment of the loan doesn’t begin until 12 months after the loan has been fully disbursed. In order to access this new program, pet retailers should inquire at their local bank or go to www.sba.gov.


5. Expanded Eligibility

This change was not actually part of the original bill, but was added by the SBA on May 1. In the past, eligibility to borrow money with an SBA guaranty was generally based on maximum annual revenues of $6.5 million (for retailers and service businesses) and maximum number of employees for manufacturers (500) and wholesalers (100). The temporary change will mirror the more inclusive requirements for the agency’s 504 CDC loans, with qualification based on maximum net worth of $8.5 million and average after-tax net income of $3 million for the preceding two completed fiscal years. The agency estimates that this revision will make over 70,000 additional businesses eligible.  


6. Secondary Market Liquidity
Over 40 percent of SBA loans have historically been sold by the originating lender, but this market froze up with most of the other credit markets in the fall of 2008. The result has been that some capital-constrained lenders had dramatically slowed or eliminated new SBA loan originations. The Recovery Act includes an additional provision for over $15 billion in previously approved TARP (Troubled Asset Relief Program) funds to be designated for purchases of 7(a) and 504 first-lien loans from originating banks. While this part of the bill does not directly impact pet business borrowers, it should have a positive impact on credit availability. Says Zarnikow: “By unfreezing the secondary market, it expands access to capital for small businesses.”


Early indications are that the Recovery Act already has begun to stimulate more SBA lending during 2009. Within two and a half months of the passing of the bill in early May, the SBA reported that the average weekly 7(a) loan volume had increased by more than 25 percent, with new SBA loans extended by nearly 450 lenders that had not made loans since October 2008.

So, how can you tap into these positive changes in SBA lending to access needed capital for your pet retail business? Contact your local bank, or log onto the SBA website (www.sba.gov) and click on the button for “local resources” to find a list of SBA lenders in your area.

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