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Wednesday, March 25, 2009

The New SBA lending guidelines & What it Means to your Business

Like most business owners, you're probably wondering how the new bill affects lending and SBA guidelines. Well, here are three main areas to pinpoint:

  1. SBA-backed loans now have a 90% guarantee increase. Since startups normally cannot get loans because of a lack of guarantees, the SBA is now taking an increased interest in paying back banks in the event of a default loan. The only downside is that for some smaller loans, it may entail a business owner receiving a lower dollar amount due to down-payment requirements. Also, credit score requirements will also be more stringent.
  2. Fees waived: loan fees may seem small in nature but they add up on SBA loans; especially when your business requires a high loan amount. Fees are now waived for major SBA loans (i.e. 504 loans)
  3. $35,000 bridge loans for business owners who have fallen on hard times. This loan should help them pay bills and/or take care of payroll in a down month. Only downside--lenders are not sure who fits this bucket yet, they await further guidelines.
Plus: Ever heard of the secondary market for SBA loans? This is where broker-dealers buy huge sums of SBA loans from banks and then resell them in the form of securities. By doing this, money is freed up for banks to lend because now there's interest being made and the bank has investors.
Think of it as the same way bonds work. See, in order for your nearest hospital to be built, municipal bonds are sold to consumers at certain interest rates, and the money is then used to build municipalities (like your hospital).
The problem is, these secondary brokers have bought huge sums of SBA loans and have had trouble reselling them. They usually resell in the forms of pension funds, to European banks, etc. However, with the current economy, they are now sitting on huge pools of money that they must sell in order to give banks the incentive to lend.
Otherwise with no help from secondary lenders, banks preserve their extra capital instead of lending. Why? Well banks must keep certain reserves for various reasons.
So without the help of the secondary market to make them some extra money, banks simply sit on the cash they have to protect themselves.
So, the Obama Administration will now have the Treasury Department buy back about $15 million in securities linked to small business loans; in order to free up the credit crunch. Sounds good right?

I'll be following closely and keeping you updated right here. Stay tuned!


2 comments:

Thanks for breaking this down so simply. Whew! We all are keeping our ears open because times are rough!

I would be very curious to find out about this $35k guidelines--heard some will be in the form of a line of credit...

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