SBA Loans: The Irony of Cutbacks and Finding Your Funding

One thing you can always count on from Washington is irony, and today they did not disappoint. To date, the US Government under Bush and Obama have spent well over a trillion of your tax dollars and mine to shore up the economy and, specifically, to “inject liquidity” into the credit market. We have had TARP I and TARP II, the Stimulus Bill, the federal spending bill, earmarks, pork, bailouts and anything else they could think of to throw money at. The Chinese have bought T-bills until it hurt and now we are printing enough money to double the money supply in this country just so the Fed can buy more T-bills. On top of that we now have trillion dollar budget deficits and governmental power-grabs that would make the Medicis blush and for what? Well, among other social and political goals, they are ostensibly doing this so the banks will loan money to you.

Problem is that the banks, for the most part, are not budging. They're not lending, either, and today the situation got a little worse as four of the Small Business Administration's lending banks cut their lending to nothing. According to

Temecula Valley Bancorp (TMCV) and Capital One Bank (COF, Fortune 500) have stopped taking applications for new loans through the Small Business Administration's flagship 7(a) loan program, and Bank of America (BAC, Fortune 500) has slowed its lending volume to a trickle. Small Business Loan Source, a non-bank SBA lender that specialized in commercial real estate financing, is closed to new applications and leaving all new SBA lending activity to its parent company, First Bank in Clayton, Mo.

These four institutions were among the 30 largest SBA lenders in the 2008 fiscal year, accounting for 4% of the program's loan volume, or $524 million of the $12.8 billion that was lent to nearly 70,000 businesses, according to data compiled by Coleman Publishing, which monitors small business lending trends.

Now, 4% may not seem like a great deal, but the money involved—over a half-billion dollars—is considerable and represents a fairly large number of small businesses. This, and the fact that the other banks are making no moves to fill the gap, also represents something else—the inherent weakness in the programs being used to try and deal with this problem.

Stricter underwriting figures as a major obstacle for small businesses seeking SBA loans. Many of these are troubled and have a hard time meeting the requirements with too many defaults. Another problem comes from the secondary market, where there loans are bundled and then sold to investors. Treasury is going to begin buying up these bundles soon, but there is no telling how that will change things. While these banks and other say they still make loans, but not through the SBA program, small business owners across the country continue to say that small business lending is still almost nonexistent.

And all this after that veritable hurricane of federal spending. Isn't that ironic?

Of course, that still leaves you with a very distinct need to find some funding. You need to decide if you can handle debt financing—where you borrow money—or equity financing—where you take on investors—and go from there. Sources for these include banks—a longshot these days but still worth a try—and family, friends, venture capitalists and angel investors (another longshot), microloans, personal loans, credit cards and so on. There is money out there, the problem is that this money is not moving.

Why? Because we are living in uncertain times with a government that seems content to reel from one fire to the next, never adequately extinguishing any of them. Given these circumstances, it is no wonder that the banks are not lending. They are waiting for stability and no amount of “liquidity” is going to change that. Perhaps Treasury's plan to buy up these loan bundles will provide that. We'll have to see. Some are optimistic that this will make these loans less risky to lenders and so induce them to lend more freely. I hope so, since it will be small business that pulls us out of this economic hole.

Yet I wonder, and not with a little trepidation, given the track record of this Administration and this Congress, once the money goes out and the Treasury owns all of these loans on all of these small businesses, what will happen next?