What’s Going on With SBA Loans?
We often hear economists say, “small business is the engine of our economy”, and this engine is sputtering. Government has recently spent more than a trillion and a half dollars bailing out big business, and almost none of that money has trickled down to small business. Small businesses employ almost half of all private sector employees, pay 45 percent of total U.S private payroll, and have created 60 to 80 percent of new jobs per year over the last decade, according to the SBA, so why are small businesses not getting the hand they need during these challenging economic times? What’s going on with SBA loans?
In the first quarter of the 2009 fiscal year, SBA 7(a) loans dropped 57 percent compared with the first quarter of fiscal 2008, and lending through the SBA’s Community Express program is down 76 percent from a year ago. During a recession there will always be less demand for loans, but this dramatic decline is more complex. What’s the simple explanation?
Banks can’t make as much money on SBA loans. Banks in crisis will direct funds to the products that give them the best returns. Banks can make a higher percentage on their own loans than they can on SBA loans, and SBA loan fees do not get paid to the bank—they go instead to the SBA.
60 percent of all SBA loans are made by only 10 large banks. These 10 banks are the same big institutions hit hard by the sub-prime mortgage meltdown and they’re tightening their lending across the board.
TARP dollars given to these banks have no lending requirements attached. Instead of using TARP funds to extend more loans, these banks are using federal funds to acquire weaker banks and rebuild reserves.
Smaller community banks have yet to receive TARP funds. And these are the banks that often support their local small business owners.
It’s about the secondary market. Many banks pool their 7(a) loans and sell them to investors and then use the proceeds to reinvest in new loans. Right now the secondary market is frozen, and the hope is that recent actions by the SBA and the Treasury will eventually work to return secondary market activity to more normal levels.
The SBA and new Obama administration will have to work together in 2009 to address all these issues. In the meantime, the small business engine is sputtering, while entrepreneurs tap into their personal savings and rely on credit cards to stay afloat.
