As part of the federal stimulus plan that Congress passed early this year, the Small Business Administration (SBA) made temporary changes to a number of their loan programs. These changes benefit borrowers in several ways. First, they temporarily subsidize the large upfront fees that banks charge SBA loan customers for origination and loan guarantees. Under the normal SBA 7(a) program (The SBA flagship lending program), borrowers have to pay as much as 3.5 percent of the guaranteed portion of the loan in these fees. Through December 31, 2009, or until subsidy programs run out of money, the SBA has subsidized all borrower-related fees. This results in a huge savings to businesses seeking SBA loans.
The second major change the SBA temporarily instituted is an increased loan guarantee to banks. Under the temporary program, the loan guarantees on a 7(a) loan (up to $2 million) is 90 percent. When the special program runs out, the loan guarantees will be 75 to 80 percent depending on the type of loan. This is the big reason that banks began loaning money again in the first quarter. This enhanced protection has made an enormous difference to lenders nervous about lending money. With a 90 percent loan guarantee they feel more comfortable making loans under the SBA program.
Both of these programs have been highly successful, but if they go away on December 31 as scheduled, we may see the banks that have been heavy SBA lenders this year lose their interest in the program.
I have not heard any news that Congress will extend the programs, but I don’t see how they can’t. If they don’t extend the programs through the end of 2010, the little lending activity that is going on right now may stop. During this recession Congress has not been known for making good decisions, so all bets are off as to how it will act on the issue of extending the temporary lifeline to small business borrowers.
Since it takes a minimum of 45 days (if you are very aggressive) to close an SBA 7(a) loan, if you plan on taking advantage of this program, now is the time to get your loan application going.
As additional news develops about a possible extension, I will post it here.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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