BIG NEWS (GREAT NEWS) FROM THE SBA
March 27, 2009 - There was some very good news last week. No, some great news last week, on the lending front for franchises and small businesses.
As one industry pundit commented, "It is said that 'the devil is in the details'. Today the devil got washed in the ink of a SBA Policy Notice, and came out pure as the driven snow!"
As many of you have likely heard, last Tuesday President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the Recovery Act). This Act has several provisions that directly affect SBA funding for small businesses and the ability for lenders to sell these loans in the secondary marketplace.
Many of you may not be aware that the main SBA-guaranteed loan product is the 7(a) loan. It is this product that the vast majority of start-up franchise businesses utilize. In its most basic terms, an approved lender can purchase a SBA guarantee for 75% of the loan amount, assuming it meets certain guidelines. This guarantee fee typically costs the borrower 2.00% to 3.75% of the loan amount at closing.
The Recovery Act changes this significantly.
The new SBA guarantee percentage is raised to 90% of the loan amount and the borrower's guarantee fees are eliminated.
The combination of these two initiatives should keep current SBA lenders in the marketplace and bring back lenders that have left the arena over the past year. It should also encourage all lenders to offer and close more loans. The further addition of guarantee fee elimination allows for borrowers to utilize the SBA's loan program at significant savings (nearly $10,000 in savings on a $250,000 loan).
As significant, a second provision in the Recovery Act allocates up to $15 billion to unlock the currently frozen secondary market, where the originating lenders sell the guaranteed portions of these loans. In the new marketplace, this refers to the 90% portion of the loan. By selling off this part of the loan, it allows the originating lender to replenish his cash which can then be used to make additional loans. Under the 75% guarantee, that meant a lender could lend and replenish up to 4 times the original amount on deposit. Now under the 90% guarantee, that means the lender can lend up to 10 times the original funds on deposit.
All of this adds up to the likelihood of a significantly different lending climate over the next several months. Credit decisions will still need to be "prudent" and documented but more of the good deals that are not getting done now should be funded. Larger loans, those over $200,000, will likely get priority for a while as the log jam starts to move but we may see the smaller loans back in play as they become more profitable for the lenders.
This is all great news, and will likely impact other areas of the credit marketplace (leasing and unsecured lending, in particular).
