As we continue to diligently review the 1,000-plus pages of the stimulus bill (the American Recovery and Reinvestment Act of 2009), there is one provision that is not getting much attention, but could be very helpful for small businesses. Business. If you have a small business and have received an SBA loan from your local banker, but are having trouble making payments, you may be able to get a “stabilization loan.” That’s how it is; eventually, some of the bailout money goes into the hands of the small business owner, instead of sinking into the proverbial deep well of the stock market or the big banks. But don’t get too excited. It is limited to very specific instances and is not available to the vast majority of business owners.
There are some news articles that boldly state that the SBA will now provide relief if you have an existing business loan and are having trouble making payments. This is not a true statement and needs to be clarified. As seen in more detail in this article, this is incorrect because it applies to problem loans made in the future, not existing ones.
Is that how it works. Suppose you were one of the lucky few who found a bank to make an SBA loan. He continues on his merry way but runs into tough financial times and finds it difficult to pay. Remember that these are not conventional loans, but loans from an SBA-licensed lender that are guaranteed against default by the US government through the SBA (depending on the loan, between 50% and 90%) . Under the new stimulus bill, the SBA could come to your rescue. You’ll be able to get a new loan that will pay off your existing balance on extremely favorable terms, giving you more time to revitalize your business and get back on track. It sounds too good to be true? Well, you are the judge. Here are some of the features:
1. Does not apply to SBA loans obtained before the stimulus bill. As for non-SBA loans, they can be pre- or post-enactment of the bill.
2. Does it also apply to SBA guaranteed loans or conventional non-SBA loans? We don’t know for sure. This statute simply says that it applies to a “small business that meets the eligibility standards and section 7(a) of the Small Business Act” (Section 506(c) of the new Act). It contains pages and pages of requirements that could apply to both types of loans. Based on some of the preliminary SBA reports, it appears to apply to both SBA and non-SBA loans.
3. These monies are subject to availability in Congress financing. Some think that the way we go with our federal bailout, we’ll run out of money sooner than the economy we’re trying to save.
4. You do not receive these funds unless you are a viable business. Boy, you can drive a truck through that sentence. Our friends at the SBA will determine if you are “viable” (imagine how inferior you will be when you have to tell your friends that the federal government has determined your business is “non-viable” and you are on life support).
5. You have to suffer “immediate financial hardship.” Too much to delay payments because you prefer to use the money for other expansion needs. How many months he has to be in arrears, or how close his foot is to the banana peel of complete business failure, is anyone’s guess.
6. It is not certain, and commentators disagree, whether the federal government through the SBA will make the loan with taxpayer dollars or through private banks authorized by the SBA. In my opinion it is the latter. It is 100% guaranteed by the SBA and would not make sense if the government itself made the loan.
7. The loan cannot exceed $35,000. Presumably, the new loan will “repay” or refinance the entire balance of the old one. So if you had a $100,000 loan that you’ve been paying on time for several years but now have a $35,000 balance and you’re in trouble, we have a program for you. Or maybe you have a loan for less than $15,000 and after a short time you need help. The law doesn’t say you have to wait any particular length of time, so my guess is that you could be in default after the first few months.
8. You can use it to offset no more than six months of monthly delinquency.
9. The loan will be for a maximum term of five years.
10 The borrower will pay absolutely no interest for the duration of the loan. Interest may be charged, but will be subsidized by the federal government.
eleven Here’s the big part. If you get one of these loans, you don’t have to make any payments for the first year.
12 Absolutely no upfront charges are allowed. Obtaining such a loan is 100% free (of course, you have to pay the principal and interest after the one-year moratorium).
13. The SBA will decide whether or not a guarantee is required. In other words, if you have to put liens on your property or residence. I assume they will relax on this requirement.
14 You can get these loans until September 30, 2010.
15. Because this is emergency legislation, within 15 days after the bill is signed, the SBA has to make the regulations.
Here is a summary of the actual legislative language if you are having trouble falling asleep:
DRY. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- Subject to the availability of appropriations, the Administrator of the Small Business Administration will carry out a program to grant loans on a deferred to viable basis (as said term is determined in accordance with the regulation of the Administrator of the Small Business). Business). Administration) small businesses that have a qualifying small business loan and are experiencing immediate financial hardship.
(b) ELIGIBLE BORROWER: A small business as defined in section 3 of the Small Business Act (15 USC 632).
(c) QUALIFYING SMALL BUSINESS LOAN- A loan made to a small business that meets the eligibility standards in section 7(a) of the Small Business Act (15 USC 636(a)) but will not include collateral. loans (or guarantee of committed loans) by the Administrator prior to the date of promulgation of this Law.
(d) SIZE OF LOAN- Loans secured under this section may not exceed $35,000.
(e) PURPOSE: Loans secured under this program will be used to make periodic payments of principal and interest, either in whole or in part, on an existing qualifying small business business loan for a period of time do not exceed 6 months.
(f) TERMS OF THE LOAN – Loans made under this section must:
(1) have a 100 percent guarantee; Y
(2) have fully subsidized interest during the repayment period.
(g) REIMBURSEMENT- Repayment of loans made under this section shall–
(1) amortized over a period of time not to exceed 5 years; Y
(2) will not start until 12 months after the last disbursement of funds.
(h) COLLATERAL- The Administrator of the Small Business Administration may accept any available collateral, including subordinated liens, to secure loans made under this section.
(i) FEES: The Small Business Administration Administrator is prohibited from charging processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, and other fees that might be charged to a loan applicant for loans under this section.
(j) SUNSET- The Administrator of the Small Business Administration shall not issue loan guarantees under this section after September 30, 2010.
(k) EMERGENCY REGULATION AUTHORITY: The Administrator of the Small Business Administration shall issue regulations pursuant to this section within 15 days after the date of enactment of this section. The notification requirements of section 553(b) of title 5 of the United States Code shall not apply to the promulgation of such regulations.
The real question is whether a private bank will lend under this program. Unfortunately, few will because the statute makes it very clear that no fees of any kind can be charged, and how can a bank make money lending under those circumstances. Sure, they can make money on the secondary market, but that dries up, so they’re basically being asked to make a loan out of the goodness of their heart. On the other hand, it carries a 100% government guarantee for the first time so that the banks know that they will receive interest and have no chance of losing a single penny. Maybe this will work after all.
But there is something else that would be of interest to a bank. In a way, this is a form of federal bailout that goes directly to small community banks. They have non-performing loans on their books and could easily take advantage of the opportunity to bail them out with this program. Especially if they hadn’t been the recipients of the first TARP funds. Contrary to public sentiment, most of them did not receive any money. But again, this might not apply to that community bank. Since they typically package and sell their loans within three to six months, you probably wouldn’t even be in default at that point. It would be in the hands of the secondary market investor.
So is this good or bad for small businesses? Frankly, it’s good to see some of the bailout money going to small businesses, but most of them would rather have a loan in the first place than get help when they’re in default. Unfortunately, this will have limited application.
Wouldn’t it be better if we just expanded our small business programs so more businesses could get loans? What if the SBA creates a secondary market for small business loans? I have a novel idea: For now, forget about defaults and focus on making business loans available to new or existing businesses looking to expand.
How about having a program that can pay off high-interest credit card balances? There’s hardly a business that hasn’t financed itself lately through credit cards, simply because banks aren’t making loans. It’s not unusual for people to have over $50,000 on their credit cards, just to stay afloat. Talk about high interest savings. You can imagine how much cash flow this would give a small business.
We should applaud Congress for going to great lengths on short notice to introduce this plan. Sure, this is a welcome form of bailout for small businesses, but I think it misses the mark for most of the 27 million business owners who are simply looking for a loan they can afford, rather than a handout.
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