Congress Revamping SBA Loan Program

Small business owners have a large burden on their shoulders right now. Many states are looking to their small businesses to provide the boost needed to get the economy moving again. With the astounding pace of corporate restructuring and taxpayers leery of more bailout plans, Congress is working on new incentives and loan packages for small businesses.

In the yet-to-be-released stimulus package, the House version of the bill would inject $430 million into the Small Business Administration loan program. In addition, the measure will give the SBA the ability to make loans directly to business owners. This provision side-steps private lenders, who reduced their lending volumes by more than half between the fiscal 2008 and 2009 years.

The bill doesn’t cut out private lenders altogether. Instead, it increases the government-guaranteed portion of SBA 7(a) loans from 85% to 95%. The SBA’s role in lending looks much like that of the “lender of last resort.” Under the current plan, the agency will take in loan applications from small business owners and forward them to private lenders within a 100-mile radius of the applicant. If no private lenders come forward, the SBA will work directly with the applicant to provide access to capital. Under these circumstances, the SBA would also service the loan.

In another boost for private lenders, the SBA will make loans to secondary-market brokers and dealers who buy and sell small business loans. The secondary loan market is essential for primary lenders, who use the market as a way to refresh lending capital.

Although the issue hasn’t yet been addressed in the proposed legislation, President Obama has said that he favors approaches that reduce the fees associated with SBA lending. High fees and other costs have discouraged many private lenders. With private lenders unwilling to take on more risk in lending, the low returns on SBA loans has made participation in the program impractical for many lenders.

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