| As Americans, we are glued to the latest CNN, | | | | upon a floor percentage (4.5% for Community |
| Fox, or local news reporting the developments in | | | | Express loans with ten year terms) plus the Wall |
| Washington as to bail-out programs. If you are a | | | | Street Journal prime rate. So, for example, the |
| small business owner, you are waiting for your | | | | current prime rate is 3.25% and when added to |
| bailout--some good news about freeing up capital | | | | the floor percentage yields a total percentage of |
| markets so you can apply for a modest small | | | | 7.5%. But the prime rate keeps going down. As |
| business loan. Amidst this dismal news, you might | | | | such, interest becomes lower and lower and |
| be tempted to ask: "Can you hear me? Is there | | | | therefore less attractive to investors ("less |
| anyone out there still making business loans? | | | | spread"). |
| There are such lenders, but they are getting | | | | And worse yet, the number of SBA loans is |
| fewer by the day. | | | | decreasing. For example, in August and |
| To understand the problem, you have to get a | | | | September of 2008, SBA loans were down |
| grasp on how SBA lenders operate. In the days | | | | approximately 50% from the year before. |
| of our parents and grandparents, banks would | | | | As a result, the secondary market has dried up. |
| make a loan based upon their liquidity stemming | | | | According to James Hughes, President and CEO |
| from bank deposits. They kept the loans in house | | | | of Unity Bancorp, there's virtually no market left |
| and collected the interest. You did not have to | | | | for SBA loans. See Pullback in Secondary Market |
| stay awake in accounting class to figure out one | | | | Hits SBA Lenders (October 30, 2008). This means |
| can only make a limited number of loans--the | | | | that the larger banks are using exclusively |
| amount of interest you are collecting is small in | | | | depositor's monies and corporate debt to process |
| relationship to the total principal loaned. You might | | | | their loans. |
| make a $100,000 loan, but only get $10,000 back | | | | So what is a small business to do? Here are some |
| during the year on interest. At a certain point you | | | | suggestions:o Choose a SBA licensed lender that is |
| simply run out of money to loan. | | | | not a large bank. Remember, banks are the |
| But that all changed in the last several decades | | | | traditional institutions that have checking and |
| when banks were able to immediately sell their | | | | savings accounts, credit cards, CD's and the like. |
| loans on the secondary market and get cash. So | | | | In this market, few if any of them are making |
| the same $100,000 loan could immediately be sold | | | | small business loans. On the other hand, |
| for, hypothetically, $110,000 (the increased value | | | | non-depository SBA lenders are much more likely |
| or premium comes from the fact that the | | | | to loan.o Find a lender that has had many years |
| purchaser would receive interest over the term | | | | of experience with small business loans. They are |
| of loan well in excess of the principal loaned) and | | | | much more likely to be small business friendly.o |
| the bank would get fresh monies back into their | | | | Choose a lender that does nothing but SBA small |
| coffers. So they re-tooled, fired up the machines, | | | | business loans. Since this is their only way of |
| and started cranking out more and more loans. | | | | making money, they have no choice but to |
| The more they sold on the secondary market, | | | | continue loaning, even in a bad market. |
| the more profit and further loans could be made. | | | | The good news is that Congress will hopefully |
| SBA loans were particularly attractive. Investors | | | | renew the discussion of invigorating the secondary |
| drooled over those babies. The Federal | | | | market to encourage small business loans. I'm not |
| government guarantees them from default at the | | | | saying this as a wide eyed idealist, but from the |
| rate of between 50% and 90%, depending upon | | | | simple reason that capital channels cannot be |
| the program utilized. So the banks would pool | | | | plugged up indefinitely in our country. Even our |
| together and package their loans, selling on the | | | | politicians can't mess up that simple fact of |
| secondary market. Whoopee! In turn, investors | | | | capitalism. When this happens, the money will |
| would buy them almost like a security. It was a | | | | again flow. I firmly believe this will happen, it is |
| win--win situation for everyone. For this reason, | | | | only a question of when. In the next article I will |
| the secondary market was very robust for such | | | | discuss what financial institutions might still be |
| loans. | | | | making business loans. |
| But there was a downside. SBA loans are based | | | | |