Obama's New SBA Small Business Loan Program: 90% Guarantee Provides Welcome Relief

On March 16, 2009 President Obama, in a long awaited address, finally reached out to the 27.2 million small businesses in this country and extended his hand. He may not have gone to the mountain, but he certainly walked down Main Street and acknowledged the perils of struggling small business owners. And it was just a matter of time that he did so. After all, the American Recovery and Reinvestment Act of 2009 ("Recovery Act") nicely laid out beneficial provisions for small businesses and just as promised, regulations have come out by the SBA to start the ball rolling. And I'm not talking about more government promises or red tape, but bottom line capital to be infused into the coffers of deserving business owners. So let's roll up our sleeves and see one of the more important elements that was put into place on Monday.

When the Small Business Act was enacted in 1958, it had a very simple mission. Find a way to get loans to small businesses that couldn't get them through traditional channels. It did this in an ingenious way. They knew banks where reluctant to loan to small businesses, especially startups, because of fear of failure. So the SBA collected a fee on each loan and used this as a fund to pay banks if there was a default. Bingo, there was invented the SBA guarantee fee. It doesn't take a degree in rocket science from MIT and an MBA from Harvard to know this gives incentives to the banks to make more loans.

SBA loan programs historically had guarantees of 85% for loans of $150,000 or less and 75% for loans greater than $150,000 (13 CFR Part 120). On the other hand, there are some programs that only go as high as 50%, including the Express Loan program (for those types of loans the new guarantee will not change).

As we all know, on February 17, 2009 the President signed into law the Recovery Act which, under section 502, authorized the SBA to guarantee loans up to 90%. On Monday, the SBA completed its review of the legislation and announced in a Policy Notice that indeed the guarantee would go up to 90% effective March 16th under the various 7(a) SBA loan programs.

Think about this for a moment. Simple math tells us more guarantee, the greater the likelihood of the bank making the loan. For goodness sakes, 90% is tapping on the door of a 100% guarantee! Also note the guaranteed portion is typically sold on the secondary market (which has recently shut down to almost nothing) so there is more chance for loans to be sold and more money to go back into the coffers of the banks for further lending.

Now let us translate this into popular programs for small businesses. The Community Express Loan Program allows quick and reasonably priced SBA loans up to $250,000 (although most lenders are dispersing monies in the neighborhood of between $5,000 and $50,000 unsecured). They are now guaranteed to 90%. And remember there are lenders now making such a loans even in this economy. The equally popular U.S. Patriot Express Loan Program for veterans and their spouses or windows, goes to $500,000 and is also guaranteed now to 90%. At the same time, the workhorse 7(a) loan program, which is usually for loans in the hundreds of thousands of dollars, was likewise increased to 90%. Not to bore you with the details, but the only exceptions are almost minuscule, namely the guarantees are not used for business ventures involved in gambling, aquariums, zoos, golf courses, or swimming pools. Further, the SBA will not issue a guarantee to a borrower that hires, recruits, or refers for a fee, employees that are unauthorized aliens as defined by the Secretary of Homeland Security.

And it gets even better. Banks that are already SBA lenders don't have to do anything different in the loan process. Namely, there is no change to the submission process to get a SBA guarantee loan number. They simply get their approvals from the same central processing units throughout the nation as they did before. The same streamlined paperwork.

Of course, taxpayers' dollars will be funding these guarantees, especially since the borrower no longer pays for a guarantee fee on closing. In other words, the 90% guarantee will stay in effect as long as there is money appropriated by Congress. The current estimate is that approximately $8.7 billion will be allocated for these guarantees, of course depending upon the loan volume and default rate.

So how will the banks react to this news? Many experts predict in a favorable manner. Obviously, with a 90% guaranty, there is less risk if the loan goes south. This also means the traditional robust secondary market for purchasing government backed loans, once it starts to kick-in, will also find them desirable for purchase in investment pools. There is also another intangible you don't read about in the news: The environment in Washington has never been better for small businesses. You now have an Administration that respects small businesses and wants to do everything it can to engender their success.

Translation: banks are comfortable with the new SBA (as opposed to the more insular and contentious regime under the Bush administrations that spent more time fighting and failing to communicate with lenders than trying to treat them as partners) and so more willing to make loans even though the default rates go higher. They know the Obama Adminstration will probably understand the situation because of current market conditions.

So for the small business owner, this news of 90% guarantees is very favorable. Why did it take them so long?

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