If you are a small business owner that has toyed with the idea of a SBA loan, is there anything beneficial in the new economic recovery act ("The American Recovery and Reinvestment Act of 2009") that will help me? It may surprise you to learn there is. No, I am not a paid spokesman for the U.S. government. Let me go one step further. What if there was a program paid by taxpayer dollars that actually reduced your cost of doing business in procuring a loan? You would probably think it was another chimerical attempt by Congress to bluff the American public. But it's actually true.
Here is how it works. When you get a SBA loan from your local banker (come on now--it is possible in this economy), you have to pay at closing what is called a "SBA guarantee fee". These fees are dutifully collected and sent off to Washington to create a war chest. If you have the misfortune of defaulting on your loan, the lender can tender this default to the U.S. government and receive between 50% and 85% (possibly 90% under new laws) of the loss as reimbursement. In fact, that is one the purposes of the SBA: to cover defaults through the SBA guarantee loan program. But as the applicant, you have always had to pay this out of pocket. And it wasn't cheap. For a loan up to $150,000, the fee was 2% of 50% of the loan value (the 50% in this example is the guarantee amount). It was 3% for loans above that amount. For example, with a $150,000 loan, you would be paying approximately $1,500 ($150,000 X .02 X .50) just for the guarantee fee, in addition to additional costs such as the processing fee, appraisal, etc. This is money that would ordinarily have gone into your pockets for business use. For the hearty among us who like to read the actual provisions of the statute, here you go (15 U.S.C. 636(a)):
(18) Guarantee fees.-
(A) In general.- With respect to each loan guaranteed under this subsection (other than a loan that is repayable in 1 year or less), the Administration shall collect a guarantee fee, which shall be payable by the participating lender, and may be charged to the borrower, as follows:
(A) In general.- With respect to each loan guaranteed under this subsection (other than a loan that is repayable in 1 year or less), the Administration shall collect a guarantee fee, which shall be payable by the participating lender, and may be charged to the borrower, as follows:
(i) A guarantee fee not to exceed 2 percent of the deferred participation share of a total loan amount that is not more than $150,000.
(ii) A guarantee fee not to exceed 3 percent of the deferred participation share of a total loan amount that is more than $150,000, but not more than $700,000.
(iii) A guarantee fee not to exceed 3.5 percent of the deferred participation share of a total loan amount that is more than $700,000.
(iv) In addition to the fee under clause (iii), a guarantee fee equal to 0.25 percent of any portion of the deferred participation share that is more than $1,000,000.
Cries have been coming from borrowers for years as to these fees. Senator Kerry and Snow have been listening. They have long proposed reducing or doing away entirely with those fees. So how does it work? Simply as a subsidy. Instead of the borrower paying it, taxpayer dollars are used for that war chest. In other words, Federal funds are used to guarantee a Federal program-that's right.
Now the good news. Section 501 of the new stimulus Act does away completely with borrower paid SBA guarantee fees. For example, there are no longer such fees through September 30, 2010 for the 7(a) program, the classic SBA everyday "work horse" loans that are usually in the hundreds of thousands of dollars. This is what the new act says:
Sec. 501. Economic Stimulus for Small Business Concerns. (a) Temporary Fee Elimination for the 7(a) Loan Program- Until September 30, 2010, and to the extent that the cost of such elimination of fees is offset by appropriations, with respect to each loan guaranteed under section 7(a) of the Small Business Act (15 U.S.C. 636(a)) for which the application is approved on or after the date of enactment of this Act, the Administrator shall-
(1) in lieu of the fee otherwise applicable under section 7(a)(23)(A) of the Small Business Act (15 U.S.C. 636(a)(23)(A)), collect no fee; and
(2) in lieu of the fee otherwise applicable under section 7(a)(18)(A) of the Small Business Act (15 U.S.C. 636(a)(18)(A)), collect no fee.
But it also applies to the smaller loans. For example, SBA Community Express Loans which are between $5,000 and $25,000 unsecured. They are a pilot program which is subsumed under the same subsection of the Small Business Act. They require very little paperwork and usually receive a tentative answer within two days. There is no prepayment penalty, no requirement for business plans or financials, and are at a 7 year low of 7 ¾% interest which equates to $60 per $5,000 borrowed. Although not nearly as much, the reduction in the guarantee fees for these loans does add up. For example, the fee for a $15,000 loan is $255.00.
But does this have the effect of making banks open up their coffers and loan more money? Does the fact that the fees are lower make it easier to get a loan? Experts are divided on this subject but in my humble opinion, it will have little effect. Sure it is beneficial to the borrowers, but it is not going to provide any incentive to a lender. Remember, lenders don't make any money either way on this: they simply collected from you, bundle it up, and send it off to D.C. They are more interested in selling for a profit on the secondary market and getting their loan processing fees, which have not been eliminated. So it is basically a wash. In another article I will give my opinion as to what will really help to inspire banks to wake up in the morning and do the right thing by loaning money.
So we're back to where we were before: banks are still holding back and the stimulus does little to specifically change that fact. Sure, it is anticipated that further monies will bail out the financial institutions (this time with very strict accountability and transparency rules, especially as to executive compensation, bonuses, and golden parachutes-under the Recovery Accountability and Transparency Board), but what they really need is a new secondary market or stimulus to our existing one. Since banks almost always sell their loans on the secondary market, unless it flows in that direction, they are not going to make loans, regardless of fees collected.
So the meantime, I can at least tell my borrowers their fees will be lower. Every little bit helps in this quirky economic environment for small businesses.
Sue Malone is a small business advocate and founder of Strategies For Small Business, a company devoted to providing SBA Loans for small business owners, whether as start-ups or for the expansion needs of existing businesses. For six years she has been the nations #1 provider of SBA Community Express Loans, having funded over 25,000 businesses in all 50 states. For a free loan consultation or for more information on the programs , visit our website at: http://www.StrategiesForSmallBusiness.com Or call (925) 899-8449.
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