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A Short-Term Crunch for Small Business?

Jeremy Quittner (BusinessWeek)

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February 18, 2010

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By extending some of the stimulus provisions that apply to Small Business Administration-backed lending and by giving community banks access to Troubled Asset Relief Program funds, bills in both the House and Senate could improve small business’ access to financing in 2010. But it may be impossible to reconcile the two bills quickly enough to prevent SBA lending from heading into another tailspin. “We are in a very fragile economy,” says James Ballentine, head of small business policy for the American Bankers Assn. “If the [stimulus] money is exhausted and can’t be restored, we will see a sizable drop in SBA loans.” On Nov. 24, the SBA announced that stimulus funding for SBA lending had dried up.

Both bills follow the Obama Administration’s Oct. 21 announcement it wants to let community banks use funds from TARP to lend to small businesses. The Administration also seeks to raise the cap on the SBA’s flagship 7(a) loans to $5 million from $2 million, and to boost the limit for the SBA’s 504 expansion loans to $5.5 million from $4 million. The microloan cap would jump to $50,000 from $35,000. While Treasury is in charge of TARP, Congress must O.K. changes to SBA loan programs.

Since March 2009, about $375 million in stimulus has been used to increase government guarantees on 7(a) loans to 90% and eliminate borrower fees on both 7(a) and 504 loans. Both houses are discussing extending that funding. The SBA says stimulus money has so far supported about 36,000 loans, totaling $14 billion. Before those funds were available, 7(a) lending had dropped about 50%. Based on current loan volume, SBA spokesman Jonathan Swain estimates it would take about $50 million to $55 million more per month to continue the initiatives.

Still, some business owners don’t see much to cheer about. John Johnson, president of Frankfort (Ill.)-based Graceful Concepts & Images, a three-employee interior design company with $650,000 in sales, says he has applied to 10 institutions in the past year, half of them community banks, seeking about $150,000 for gap financing and to buy inventory for contracts he’s signed. “The President is so committed to getting money into the hands of small businesses, but … it is going to assist businesses that … already have good funding sources,” Johnson says. He says bankers have told him his company lacks adequate cash flow, and at 620 his credit score isn’t high enough for a loan.

Meanwhile, some community bankers say they have no desire to tap into TARP. Gilles Gade, chairman of Cross River Bank in Teaneck, N.J., says the terms are likely to be too onerous. The three-year-old bank, with $80 million in assets, wants to move aggressively into small business lending. It has a $10 million portfolio of commercial loans to local small businesses, and Gade says he plans to increase that to $25 million in the next year because demand is high. Although he acknowledges that the final regulations have not been written, Gade expects the added oversight “would be very burdensome for small banks like us.”

Reprinted from the December 14 issue of BusinessWeek by special permission, copyright © 2009 by The McGraw-Hill Companies, Inc.

For more small business articles from BusinessWeek, please visit www.businessweek.com/smallbiz.