Today I was at a conference where I was speaking about alternatives to traditional bank loans. There were several speakers there from the USDA rural loan program as well as a spokesperson from the SBA. Between sessions I spoke with both governmental lending program representatives about the alarming number of banks that are no longer making these government insured loans.
Most business owners have heard about the various SBA loan programs. Many don’t know that the USDA has a very good guarantee program for businesses that are based in rural areas. The program that is available to businesses is called the B&I loan program. B & I stands for “business & industrial.”
The USDA defines a rural community as one having a population of 50,000 or less. Unlike the SBA that has a cap of $2 million on its flagship 7(a) program, the USDA can guarantee loans up to $25 million. Quite frankly I have never asked anyone from the USDA how it got into the business loan guarantee business, but for those businesses that are in eligible areas a USDA loan might make sense. The only problem is finding a lender who will make a USDA loan.
The two representatives from the USDA I spoke with acknowledged frustration with the issue of finding banks willing to participate in their lending program. One told me that potential borrowers contact his office for referrals and it is very hard for him to find a bank that is geographically located near a potential borrower. Smaller banks want to be closer to their borrowers and because the USDA loan program is for rural areas, many of the banks in those rural areas are small and very conservative.
The SBA representative at the meeting today expressed similar concerns. She was the area SBA’s lender liaison. She acknowledged that it was very hard for banks to make SBA loans very well unless they had a trained SBA lender. She also acknowledged that the banks that only make a few SBA loans a year have trouble keeping up with the rule changes and the procedures that banks must follow to make SBA loans.
The SBA representative did say that more banks are actually signed up to make SBA loans now than 2 years ago before the American Reinvestment and Recovery Act enhanced the loan programs. The enhancements which are now scheduled to expire on December 31, 2010 provide a 90% loan guarantee to banks making SBA loans. During this temporary enhancement period, borrowers also don’t have to pay any loan guarantee fees.
Both the USDA B & I program and the SBA loan programs meet the needs of borrowers that might not otherwise qualify for traditional credit. It is a shame that the programs have to be so complicated that many bankers don’t want to use them. In an economy where our government seems to be placing more rules and regulations on commercial banks and businesses it seems that a better approach to making credit available to small business owners if they simplified rules for these two worthy lending programs.