This article was written by John Seelinger, SCORE Orange County Management Counselor
On February 17h, President Obama signed “the American Recovery and Reinvestment Act of 2009”, frequently referred to as “the stimulus bill”. At several hundreds of pages long, this legislation outlined steps and spending priorities that the government hopes will get the economy growing again. Many of our Score clients are asking how this will affect them, whether this Act will make it easier to obtain financing to start or grow their businesses. Unfortunately, as with many pieces of major legislation, the Act itself is a broad brush and staff members and governmental departments need to fill in the implementation steps after the legislation becomes law. As of today, much of this is still ongoing, with the result that many questions are still unanswerable. But we do know, in order to get money flowing into the economy as quickly as possible, much of the stimulus is intended for “shovel ready” projects and most of these projects will be bid out by federal, state and local governments.
Importantly for small businesses, under the Act, the SBA has been able to increase the amount of its guarantees and also eliminate the guaranty fees both on its working capital loan program (its 7(a) program) and on its fixed asset program (its 504 loan program). While the guaranty fees to the borrower, you, have been eliminated, the SBA guaranty itself has been increased for most 7(a) loans, up to 90% on loans up to $150,000, for example. What this means is that, in many instances, a bank can now make a working capital loan to your small business and be at risk for only 10% of the loan amount. There are other features affecting loans under $35,000 but, since the vast majority of our Score clients avail themselves of 7(a) and 504 loans, these are highlighted here. Any guaranty fees you may have paid between February 17th and today are refundable.
Under the SBA’s 504 fixed asset loan program, borrowers may now take advantage of today’s generally lower prevailing interest rates by refinancing an existing 504 loan that may have been fixed in the past at a higher interest rate than that which is available today. And, again, the SBA guaranty fee has been eliminated. Additionally, the SBA has been authorized to support these loans in the secondary market, restoring liquidity to the marketplace.
One key point is that these enhancements are designed to get the economy going and are not intended to be permanent. The SBA estimates that these stimulative enhancements will be available through December 31st although, obviously, this is subject to further legislative change should Congress deem it appropriate.
Another key point to keep in mind is that the decision to lend still rests with the banks and the banks are under heightened regulatory scrutiny today. Four banks in SoCal have been seized and another ten have had regulatory sanctions imposed on them recently and it has been estimated that as many as twenty banks in southern California will fail by the end of this year. So, yes, the “stimulus” bill and the SBA are making it more attractive for banks to lend to small businesses, but banks are being told by their regulators to tighten their underwriting standards. So, if you have a solid, up to date business plan (remember, the banks underwriting standards are getting tighter) and collateral, it may be time to speak with your bank’s SBA Lending Department again.