Reviewing the Small Business Lending Fund
The numbers are in, the “winners” have been chosen, and in this case there doesn’t even seem to be much left to shout about. After the usual hype and ballyhoo, President Obama’s much vaunted Small Business Lending Fund has ended with what Thomas K. Brown described in iStockAnalyst.com as “a thud.” Out of a total of $30 billion dedicated to helping community banks make loans to local small businesses, only about $4 billion was actually disbursed to “qualified” institutions.
Many banks that applied said that they had to deal with very confusing guidelines on what the Treasury Department wanted. Then, once they had waded through the paperwork, most of them were still declined
When the program was rolled out, it was touted as a way to get banks to invest in small business – traditionally the engine of economic recovery. The SBLF would provide qualified community banks with funding at rates as low as 1% if certain benchmarks were reached in lending to small businesses. One of the main problems, however, was the very issue of what made a bank “qualified.” Many banks that applied said that they had to deal with very confusing guidelines on what the Treasury Department wanted. Then, once they had waded through the paperwork, most of them were still declined – even banks that had been judged “well-capitalized” according to Lawrence Kaplan of Paul Hastings Janofsky & Walker LLP in an article in Bloomberg.
According to a Fox Business report, there are approximately 7400 lenders that fit the Small Business Jobs Act’s requirement of less than $10 billion in assets. Out of that number, only 933 actually applied for funding through the SBLF – for a total of $11.8 billion of the $30 billion available.By the time federal regulators and Treasury officials had finished, only 332 were actually approved for a total of $4.3 billion, about a 36% rate of approval. As late as three weeks before the program ended on September 27, the Treasury had declined 59% of all applications.
So what did we get for all the effort? On the positive side, some money has gone out to small businesses through the SBLF program. According to Bloomberg and Fox Business, banks such as Seacoast Commerce Bank in Chula Vista, Calif., and Bank of Montana in Missoula, Mont., plan to provide local businesses with needed funding. This is important, as banks that receive SBLF money are required to show increases in their small business lending. An increase in 10% in lending would make the bank eligible for a 1% interest rate on the funds received. A failure to increase loans would result in a higher rate, up to a 9% maximum.
However, it is not clear that the increased money will actually be going to new customers. In the Bloomberg article, John Dalby of Redwood Capital Bancorp of Eureka, Calif., admitted, “We met our 10 percent target and expect to do more, but, frankly, a lot of the customers we get we steal from the others.” In other cases, the new loans banks made “ are probably going to be refinancing the loans that were made by other institutions,” said First Federal Bank of Florida (Lake City) CEO Keith Leibfried in Bloomberg.
Even more distressing is the fact that 89 of the first 191 banks approved used at least a portion of the money to pay back funds received in the TARP bailout. So the government in effect handed out money it had to borrow so banks could pay back money they had borrowed from the government in the first place. This does not seem like a wise use of money, borrowed or otherwise.
Some economists and industry members insist that a large part of the overall problem is that “credit-worthy” businesses are not applying for loans, and this is in part true. Many businesses – the ones that did not fold during the early part of the Recession – are not in a position to qualify under federal regulators’ definition of “credit-worthy.” Because of high unemployment (stubbornly remaining at 9.1%) and the lack of real recovery, these businesses have not posted the income numbers that regulators want banks to accept. Thus, they are deemed “poor risks” even if they have never defaulted on a loan or closed a location. Additionally, many other businesses are refusing to take any chances while the economy is still weak and long-term regulatory issues are unresolved.
Moving forward from here is going to continue to be a slow process. There may be some resolution on coming regulations – for good or ill – when the Supreme Court takes up Obamacare in the near future. But that is only one issue that is holding back businesses. With large elements of the government still in favor of increasing taxes on the “wealthy,” many small businesses will continue to hold back from expanding (read “hiring more workers”) until they know they will be able to afford keeping new hires on the books.
If you are one of the rare businesses looking to expand and are interested in either a conventional or SBA loan, be sure to get some straight answers before you make a move. With over 30 years in the industry, I have the experience to give you the information you need to make a decision on funding and the connections to help you move forward. If you are considering purchasing or expanding a restaurant, please be sure to watch the special video on this site.
Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722.
Category: Business
