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Changes in Washington, but still same old Small Business Administration
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I wrote an opinion piece a little while back about changes that have been made to the SBA recently. They’ve been helpful, but not enough to have the major positive impact that small and mid-sized businesses need so badly. The Orlando Sentinel picked it up and published it on their website last week. If it seems a little dated, it’s because I wrote it back in August and it’s just now getting some attention.

Later today, President Obama will address the lack of credit that’s affecting lots of business owners these days. I’m interested to hear what he has to say, and you can be sure I’ll post my thoughts and opinions about it here for all to see . . . so be sure to check back. Whether you agree with me on every issue or not, you can always trust me to say what I think without tip-toeing around anything.

Here’s the article from the Orlando Sentinel’s website. Let me know what you think by leaving me a comment when you’ve finished reading it.

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Christopher G. Hurn: Changes in Washington, but still same old Small Business Administration

The recent focus on changes for the Small Business Administration with its new America’s Recovery Capital loan program has effectively appeased many Washington watchers, convincing them that the concerns of small businesses are being addressed with this long-anticipated program.

Yet the reality outside of the capital is very different, as most observers believe the program will leave thousands of qualifying businesses disappointed and disillusioned after being turned away due to the lack of funds and bank participation. Unfortunately, for these and the rest of America’s small businesses, which employ nearly 70 million people and create 80 percent of the new jobs in the country, meaningful changes for the SBA that could truly make a positive impact have not yet been implemented.

The ARC loan program’s overall impact will be fairly minimal, as it will be limited to 5,000 to 10,000 loans and the maximum $35,000 amount means little to businesses that require more significant help. Given the anticipated nearly 60 percent default rate, the program could easily turn into a federal bailout for small businesses, which would cause significant harm to the SBA’s image and reputation.

Revamping existing SBA loan programs and underwriting practices lacks the sizzle and political appeal of creating and launching a new loan program, but simple changes to the existing loan programs would have a much more significant impact for businesses and the economy as a whole. On June 24, the SBA announced just such a change when it revamped its “504” loan program, which is reserved for the purchase of commercial property and equipment, to allow it to be used to refinance existing debt if the new loan is to fund an expansion.

However, the new measure does not go far enough to help as many businesses as it possibly could, and it appears to be so restrictive that it will only help a very small number of businesses in the current economic climate. Because the refinancing must be tied to business expansions, which are relatively rare in the midst of this recession, most SBA lenders expect demand to be weak.

The SBA and its lenders must accept the reality that most businesses are seeing downward trends this year, including most of the banks that are underwriting the loans. The agency’s job creation and expansion requirements are too stringent in the current economy. So now is the time to temporarily suspend them in favor of more general requirements so that funds can be used for legitimate business purposes, including efforts such as marketing and advertising campaigns.

Cash-out refinancings that are not necessarily tied to expansion projects are just the capital jolt that many small businesses need right now. By allowing less-restrictive refinancing into inexpensive SBA loans, the government would provide business owners with the means to secure funds to pay their debts, buy equipment, launch marketing initiatives, add jobs and further grow their businesses.

As an added benefit, SBA-backed cash-out refinancings can help struggling banks reduce their asset size by moving some commercial loans off their books, which would improve their capital ratios.

The adage that desperate times call for desperate measures holds true in this case, and the SBA’s responses so far to the current situation, with its ARC loan program and 504 refinance option, are grossly inadequate. The agency needs to embrace some changes that may not be as politically appealing and headline-grabbing as launching a loan program or waiving loan fees (normally financed into SBA loans).

It needs to temporarily suspend and modify its current rules and lending restrictions for its largest loan programs, which would open the door to affordable capital to the small businesses that economists predict will lead the recovery.

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Any thoughts or comments? Let me know what you think, and please share this so others can chime in, too!

13 Comments

  1. Jeff York says:

    Chris–your comments are spot on. I am not seeing any activity “on the street” which leads me to believe that a quantifiable number of businesses are willing or able to take advantage of SBA loans. The process is too cumbersome; the amounts involved (up to $35,000) are too small to be meaningful.

    Just last week the 3Q 2009 commercial real estate stats came out, and the local market continues to trend downward with increased vacancies, decreased rental rates, more negative absorption. Tough, tough market right now….

  2. Cindi says:

    I agree. I also think that the banks need educated. I have a SBA Asst. Director telling me what he will do for me but I can’t get any bank to work with me. The bank would have a 90% guarantee, what more do they want. The banks either don’t understand or don’t want to understand the SBA programs.

    You can look on the SBA websit and see how many loans were approved per month. With the number of small businesses, the loans numbers aren’t there.

  3. Braudis Lee Pegram says:

    True, inadequate; but so far proposals are in for improvement including an increase to 50k. As I have said in my past postings, changing the status quo doesn’t happen overnight, nor in many cases, 9 months.

  4. Cathi Jooyan says:

    Thank you. We really need to push for a refinance program—one that actually makes sense. I think this would have a huge impact on banks and open up lending.

  5. Dr. Perry Faison, J.D., LLM says:

    The President was on today talking about stimulus money to be given to small business in the amount of loans. The loans will be up to $5,000,000.

    Sounds great . Your thoughts?

  6. Ian Liddell says:

    i agree 100% . Our company is promoting SBA 504 for our lease clients.

  7. Elijah Mccoy says:

    I like your ideas. They made a lot of sense.

  8. MARIA SAMET says:

    Good evening Mr.Hurn

    Thank you for forwarding your blog to me. Since you wrote this piece in August I believe the situation has remained the same or perhaps gotten worse. Please let me know if there is any way I can have my opinion be heard.

  9. Larry says:

    The refinancing of existing debt with a 504 loan woould significantly increase 504 loan activity, but isn’t the purpose job creation? I am sure refinancing would assist in the job retention aspect of the program.
    In my opinion the real problem is the inconsistentcy of the Administration propaganda and the reality of how the various agencies are responding. FDIC is scrutinizing community banks more closely and changing their guidelines; the SBA is tightening up its credit standards all of this to the detriment of small business.

  10. Chris Hurn says:

    Thank you all for your comments.

    Cindi – you’ve pointed out a fundamental problem with the President’s approach to “getting SBA-backed capital flowing again,” namely that only a certain portion of the nation’s 9,000 banks will ever offer SBA lending. It takes a certain amount of specialized knowledge to provide them, and it isn’t the easiest lending to “get right.” Outreach and education by the SBA would help, but the SBA also has to reassure banks that their guarantees won’t get pulled. There is deep suspicion there, among many in the banking world, that the SBA will “leave them hanging” – it has happened in the past. So, in short, throwing money at small banks who’ve never done an SBA loan or have done a limited number, poses another set of potential problems. We shouldn’t just “throw money at the problem” – that rarely, if ever, works.

    Braudis – In a “crisis situation,” change NEEDS to happen more readily than 9 months. We can and should do better.

    Cathi – Indeed it would. It’s been something I’ve been advocating for over two years now.

    Dr. Faison – Thanks for the email. Read the next blog post and you’ll see. I’m on it . . . and there will be more shortly.

    Maria – Posting here is always a way – you’d be surprised how many people read my blog. It’s not the “best” method of distribution, but it’s a start. Of course, the next step is to speak with you congressional representative.

    Larry – I don’t really disagree with you. In a crisis, we need to retain the jobs we have first, then we can focus on job creation. Allowing 504’s to refinance embedded equity in commercial property (which many banks aren’t interested in doing right now), for instance, would provide capital with which business owners could retain jobs and possibly start planning for future growth. To your second point: there is definitely a differing set of agendas that few people want to shed a light on – politicians (for all of their failings here) are generally on the side of the public in wanting to see Recovery; the regulators are in crisis mode and are over-reaching in their efforts to “save as many banks as possible” . . . NOT necessarily to “save” the economy. The problem is that these are at odds with one another. We need to save the banks that can be saved; let some fail (capitalism must destroy in order to create again); lessen (not increase) the burden on small business owners; and do all we can to get credit flowing again. It’s not an easy task, but it IS one that we should be able to handle.

  11. Michael says:

    I worked very hard to utilize the ARC loan program and to use this as a test to see what the respone would be. WOW, it was as I expected, nothing but promises, LOTS of forms, and at the end of the day ZERO results. Another government promise unfulfilled!

  12. Sal Duran says:

    How can we manage or help those commercial properties with a liability or mortgage debt higher than the actual property value? or

    How can we provide a business loan for a company that is just making it?

    We need partcipation from public entities with less cumbersome procedures and companies need to respond with better efficient and effective ways to succeed in business.
    We need to take the experience of the ARC loan programs. There are too many forms and almost zero results.

  13. Mark says:

    Chris the problem is banks are being told on one hand to loan money yet the Feds FDIC Occ are in the banks forcing them to move loans off their books in industries that have a high rate of failure. Lenders are being sent all types of mixed messages so they are exercising caution.

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