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Small Business Loan Update – Stimulus Bill Helps Bailout Businesses If They Cannot Pay Loans
As we continue to dutifully wade through the 1,000+ pages of the American Recovery and Reinvestment Act of 2009, there is one provision that doesn’t get much attention, but could be very beneficial to small businesses. If you are 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 right; finally some bailout money is going into the hands of the small business owner instead of going down the proverbial deep hole of the stock market or big banks. But don’t get too excited. It is limited to very specific cases and is not available to the vast majority of business owners.
There are some news stories that boldly claim 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 this article explains in more detail, this is incorrect because it applies to problem loans made in the future, not existing ones.
Here’s how it works. Let’s assume that you are one of the lucky few who have found a bank for an SBA loan. You continue on your merry way, but run into tough economic times and find it difficult to pay off debt. Remember that these are not conventional loans, but loans from an SBA licensed lender that are guaranteed for default by the US government through the SBA (depending on the loan, between 50% and 90%). Under the new stimulus bill, the SBA can come to your rescue. You will be able to get a new loan, with which you will pay off the existing balance under extremely favorable terms, which will give you more time to revive your business and get back in the saddle. Sound too good to be true? Well, you be the judge. Here are some features:
1. Does not apply to SBA loans made prior to the stimulus bill. As for non-SBA loans, they could be before or after the bill goes into effect.
2. Does it apply to SBA guaranteed loans or conventional non-SBA loans as well? We don’t know for sure. That statute simply says that it applies to “a small business concern 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 preliminary SBA reports, it appears to apply to both SBA and non-SBA loans.
3. This money is subject to availability in congressional funding. Some think that given our federal bailout, we’re going to run out of money before the economy we’re trying to save.
4. You don’t get that money unless you are a successful business. Boy, you can drive a truck with that expression. 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 that your business is “not viable” and on the mend).
5. You must suffer “immediate financial hardship.” So much for delaying payments because the money would rather be spent on other expansion needs. How many months you have to be a felon or how close your foot is to the banana peel of total business failure is anyone’s guess.
6. It is uncertain, and commenters disagree, whether the federal government will make a loan from taxpayer dollars through the SBA or through SBA-licensed private banks. In my opinion, it’s the latter. It has a 100% SBA guarantee and it wouldn’t make sense if the government itself was making the loan.
7. Loan cannot exceed USD 35,000. Presumably, the new loan will “take” or refinance the entire balance on the old one. So, if you had a $100,000 loan that you’ve been paying on time for years, and now you have $35,000 and you’re struggling, we have a program for you. Or you have a small loan of $15,000 and you need help after a while. The law doesn’t say you have to wait a certain period of time, so I’m guessing you can be in arrears after the first few months.
8. You can use it to make up for a maximum of six months of monthly arrears.
9. The loan will be approved for a maximum of five years.
10. The borrower will not pay any interest for the duration of the loan. Interest may be charged but will be subsidized by the federal government.
11. Here’s the great part. If you get one of these loans, you don’t have to pay for the first year.
12. No upfront costs are allowed. Obtaining such a loan is 100% free (of course, you have to pay the principal and interest after a one-year moratorium).
13. The SBA will decide whether or not insurance is required. In other words, if you need to place a lien on your property or residence. I’m guessing they’ll relax that requirement.
14. You can get these loans until September 30, 2010.
15. Because this is emergency legislation, the SBA must prepare regulations within 15 days of signing the bill.
Here’s a summary of the actual legislative language if you have trouble sleeping:
SEC. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- Subject to the availability of appropriated appropriations, the Administrator of the Small Business Administration shall operate a program to provide loans on a deferred basis to viable (as such period is determined pursuant to a regulation of the Administrator of the Small Business Administration) small businesses that have a qualified loan for small businesses and facing immediate financial difficulties.
(b) ELIGIBLE BORROWER – A small business as defined in section 3 of the Small Business Act (15 USC 632).
(c) QUALIFIED 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 does not include loan guarantees (or guarantees for loans). assumed obligations) by the administrator before the date of entry into force of this Act.
(d) LOAN SIZE – Loans guaranteed under this section may not exceed $35,000.
(e) PURPOSE – Loans guaranteed under this program will be used to make periodic payments of principal and interest, in whole or in part, on an existing qualified small business loan for a period not to exceed 6 months.
(f) LOAN TERMS – Loans made pursuant to this section:
(1) have a 100% guarantee; and
(2) have fully subsidized interest for the repayment period.
(g) REPAYMENT- Repayment of loans made pursuant to this section shall be:
(1) is amortized over a period not exceeding 5 years; and
(2) begins only 12 months after the final disbursement of funds.
(h) SECURITY- The Administrator of the Small Business Administration may accept any available security, including subordinated liens, to secure loans made under this section.
(i) FEES – The Small Business Administration Administrator is prohibited from charging any processing fees, origination fees, application fees, points, brokerage fees, bonus points, early payment penalties, and other fees that may be charged to an applicant for loan. 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 RULEMAKING AUTHORITY- The Administrator of the Small Business Administration shall issue regulations under this section within 15 days after the date of enactment of this section. The notice requirements of section 553(b) of title 5, United States Code, do not apply to the promulgation of such regulations.
The real question is whether a private bank will lend under this program. Unfortunately, few people will do this because the statutes are very clear that no fees are allowed to be charged and how the bank can make any money by lending in such circumstances. Sure, they could make money on the secondary market, but that has dried up, so they’re essentially being asked to lend out of the goodness of their hearts. On the other hand, it carries the first 100% government guarantee, so the bank knows it will receive interest and won’t stand a chance of losing a cent. Maybe this will work after all.
But there is something else that the bank would be interested in. In a way, this is a form of federal aid that goes directly to small community banks. They have defaulted loans on their books and could easily jump at the chance to bail them out with this program. Especially if they weren’t the recipients of the first TARP funds. Contrary to public opinion, most of them did not receive any money. But then again, that may not be the case for this community bank. Since they typically package and sell their loans within three to six months, there probably wouldn’t be a default at all at that point. It would be in the hands of a secondary market investor.
So is this good or bad for small businesses? Frankly, it’s good to see some bailout money making its way to small businesses, but most of them would rather have a loan first than a bailout in the event of a default. Unfortunately, this will have limited use.
Wouldn’t it be better if we simply expanded our small business programs so more businesses could get loans? What about the SBA creating a secondary market for small business loans? I have a new idea: forget defaults for a moment and focus on making business loans available to startups or existing businesses that want to expand.
What if you had a program that could pay off high interest credit card balances? There is almost no business that has not recently been financed by credit cards, simply because banks do not give loans. It’s not uncommon for people to have $50,000 more on their credit cards just to stay afloat. Talk about high interest savings. You can imagine how much cash flow that would bring to a small business.
Congress should be applauded for doing its best in a short period of time to come up with this plan. Sure, this is a welcome form of help for small businesses, but I believe it misses the mark for most of the 27 million business owners who are simply looking for a loan they can repay rather than a handout.
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