1/18/2010 10:37:00 AM SBA loan program gets $125M infusion
Walter Cowart: Program encourages timid banks to lend to businesses.
Doug Graham Reporter, Joplin Tri-State Business Journal
A U.S. Department of Defense appropriations bill signed into law by President Obama in December 2009 includes $125 million earmarked for the U.S. Small Business Administration, enabling it to continue offering enhanced guarantees on loans through February or until the money runs out.
The SBA's loan-guarantee programs are used by entrepreneurs who want to start or expand businesses, providing protection for the lender in the event that a borrower defaults on a loan. Typically the guarantees will provide funding for 75 percent to 85 percent of the loan and include a fee charged to the borrower.
Funds from the American Recovery and Reinvestment Act will allow the SBA to offer these guarantees at no cost to borrowers for as much as 90 percent of the loans, and the latest round of appropriated funds extends that ability.
"If there's a default and a nonpayment of the note, the maker of the note - the SBA - wire transfers 90 percent of the balance to the participating bank, therefore reducing the bank's risk from 90 percent to 10 percent," said Walter Cowart, manager of the Springfield SBA branch. "If it's a total loss, the bank only loses 10 percent of the total loan amount."
The aim of SBA loan guarantees, Cowart said, is to encourage banks to lend at a time when many are afraid to do so.
"We were a tiny part of the overall stimulus, but we're doing our part to stimulate the overall business community," Cowart said.
Cowart said that the $375 million originally allocated for the SBA's loan guarantee programs ran out in November, three months before ARRA funding for the program was scheduled to end. This new money from the appropriations bill will allow the SBA to continue guaranteeing loans at 90 percent and at no cost to borrowers through at least mid-February.
"We can offer SBA loans at a savings to the customer because they no longer have to pay a guarantee fee, and that can run anywhere from 2 percent to 3.5 percent of the guaranteed portion of their loan, so it can be a significant amount of money," said Jackie Randle, senior vice president/SBA loan administrator at Arvest Bank. "It definitely helps them by giving them a savings."
Randle said banks look at several parameters, including how well they think a business will succeed in the existing economic climate, before making loans. While she can't say the 90 percent guarantee can make the difference in whether a potential borrower is granted a loan, she said it does make a difference for borrowers.
"It definitely encourages your small businesses to take a look at SBA, (which) before, they might not have done," she said.
Cowart said that any losses the SBA might experience from one of its guaranteed clients defaulting on a loan are normally covered by a guarantee fee, which is based on a percentage of the amount of the loan. This fee has been waived during the ARRA-funded loan enhancement period.
"The fees were adequate in the past to allow the agency - the 7(a) loan program - to work off-budget," Cowart said. "There was no subsidy because the fees were covering the losses. But since we were charging no fees since last February, there had to be (additional money) to cover the losses."
The extension included in the Defense bill authorizes the higher guarantee levels through Feb. 28. The fee relief is authorized until this additional funding is exhausted or the end of the fiscal year, whichever comes first.
Cowart said SBA will transition into a queue system as the funds start to wind down in an effort to ensure the maximum stimulation from the programs and disbursement of funds.
SBJ Features Editor Maria Hoover contributed to this story.
