SBA “Jump Starts Stalled Lenders”
In recent months congress has pressured banks to increase lending to small businesses in order to spur job growth. Despite President Obama’s missed predictions like his early pledge that unemployment wont hit double digits, the economic decline is just now starting to show signs of recussitation as a result of many factors including perhaps the largest stimulus injection in history. Now, a long-awaited program approved in the stimulus package back in February 2009 is finally set to begin, albiet almost a year later, that could help make that happen by reassuring wary bankers with a new approach.
For the first time, the Small Business Administration will guarantee up to $3 billion in pools of banks’ 504 loans sold into the secondary market. Some lenders like CIT have historically packaged up groups of loans then sold them in the secondary market. When that market dried up in the fall of 2008, CIT hit the wall. Its taken a number of months to get going again, and a good part of the delay is finding buyers for the loans. Fear of failure of the borrowers in the packaged loans has reduced demand signficantly. The SBA is now going to guarantee 504 loans in the secondary market. That way, if borrowers fail to pay, investors who bought the loans would be made whole by the government. Hayley Matz, spokeswoman for the SBA, expects the program to start soon but doesn’t have a firm date. 504 loans give small businesses favorable financing to invest in fixed assets like property or machinery. Veterinarians commonly use 504 and 7A (another SBA loan type) loans.
Commercial lenders have not been able to sell their portions of 504 loans since investors lost their appetite for asset-backed securities in the financial crisis, prompting many lenders to drop out of the 504 loan program. “In essence that market has not returned,” says Kurt Chilcott, CEO of San Diego-based CDC Small Business Finance, a nonprofit that partners with commercial lenders to make 504 loans. “We’ve gone from at least half a dozen active players who were willing to purchase those loans to maybe half a player,” he says. Because banks can’t resell their loans, Chilcott estimates that 40% of the banks his firm used to…. read more
Story adapted from Businessweek article by John Tozzi, and others.