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Small Business Loan Update – Stimulus Bill Helps Bailout Businesses If They Cannot Pay Loans
As we continue to sift through the more than 1,000 pages of the stimulus bill (American Recovery and Reinvestment Act of 2009), there is one provision that hasn’t gotten much attention, but could be very helpful for 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; in the end some bailout money will go into the hands of small business owners, instead of going into the proverbial deep hole of the stock market or big banks. But don’t get excited. This is limited to specific instances and is not available to most business owners.
There are some news articles that boldly claim that the SBA can now provide relief if you have an existing business loan and are having trouble making the payments. This is not a true statement and needs to be clarified. As seen in more detail in this article, this is wrong because it applies to troubled loans made in the future, not existing ones.
Here’s how it works. Let’s say you are one of the lucky few who find a bank to make an SBA loan. You’re on your merry way but facing tough economic times and struggling to make payments. Remember that these are not conventional loans but loans from a licensed SBA lender that are guaranteed free of charge by the US government through the SBA (depending on the loan, between 50% and 90%). Under the new stimulus bill, the SBA can help you. You can get a new loan that will pay off the existing balance on more favorable terms, buy more time to change your business and get back in the saddle. Sound too good to be true? Well, you be the judge. Here are some of the features:
1. Does not apply to SBA loans taken out before the stimulus bill. With non-SBA loans, this can be done before or after the bill.
2. Does this apply to SBA guaranteed loans or non-SBA conventional loans as well? We don’t know the truth. This law only states that it applies to a “small business concern that meets the eligibility criteria and section 7(a) of the Small Business Act” (Section 506 (c) of the new Act). That contains pages and pages of requirements that may apply to both types of loans. Based on some of the preliminary reports from the SBA, it appears that this applies to both SBA and non-SBA loans.
3. These monies are in the funds of Congress. Some think the way we’re going with our Federal bailout, we’re going to run out of money before the economy we’re trying to save.
4. You cannot get these monies unless you are a profitable business. Boy, you can drive a truck with that phrase. Our friends at the SBA will determine if you are “viable” (imagine how low you would be if you had to tell your friends that your business was determined by the Federal government to be “not viable” and on life support).
5. You must suffer from “immediate financial difficulties”. So much for holding down payments because you want to use the money for other expansion needs. How many months you have to be delinquent, or how close your foot is to the banana skin of complete business failure, is anyone’s guess.
6. It is uncertain, and commentators disagree, whether the Federal government through the SBA will lend from taxpayer dollars or to private SBA licensed banks. I think it’s the latter. It carries a 100% SBA guarantee and I have no idea if the government itself is the borrower.
7. The loan cannot exceed $35,000. Most likely the new loan is to “take” or refinance the entire balance of the old one. So if you have a $100,000 loan that you have been paying on time for years but now have a balance of $35,000 and are in trouble, boy do we have a program for you. Or maybe you have a small $15,000 loan and after a short period of time need help. The law doesn’t say you have to wait any particular period of time so I believe you can default after the first two months.
8. You can use it to pay no more than six months of delinquencies per month.
9. The loan is for a maximum term of five years.
10. The borrower does not pay full interest for the duration of the loan. Interest may be charged, but the Federal government will support it.
11. Here’s the big part. If you get one of these loans, you don’t have to pay for the first year.
12. No advance payment is allowed. Getting 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 collateral is required. In other words, if you have to put liens on your property or residence. My guess is that they will relax this requirement.
14. You can get these loans until September 30, 2010.
15. Since this is an emergency legislation, within 15 days after signing the bill, the SBA must make regulations.
Here’s a summary of the actual legislative language if you’re having trouble sleeping:
DECLARED by SEC. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- Subject to the availability of appropriations, the Administrator of the Small Business Administration shall conduct a program to provide loans on a deferred basis for survival (as such term is determined pursuant to regulations of the Administrator of the Small Business Administration) concerns small businesses that qualify for small business loans and are experiencing immediate financial hardship.
(b) DEBTOR ACTIVITY- A small business concern as defined under section 3 of the Small Business Act (15 USC 632).
(c) SMALL BUSINESS LOAN- A loan made to a small business concern that meets the eligibility criteria of section 7(a) of the Small Business Act (15 USC 636 (a)) but shall not include loan guarantees (or loan guarantee commitments made) by the Administrator before the date of enactment of this Act.
(d) LOAN SIZE- Loans guaranteed under this section may not exceed $35,000.
(e) PURPOSE- Loans guaranteed under this program shall be used to make periodic payments of principal and interest, in whole or in part, on an existing qualified small business loan within a period of time not exceeding 6 months.
(f) LOAN TERMS- Loans made under this section shall:
(1) carry a 100 percent guarantee; and
(2) have interest fully subsidized for the repayment period.
(g) PAYMENT- Payment for loans made under this section shall–
(1) amortized over a period of time not exceeding 5 years; and
(2) shall not commence until 12 months after the last disbursement of funds is made.
(h) COLLATERAL- The Administrator of the Small Business Administration may accept any available collateral, including subordinated liens, to secure loans made under this section.
(i) FEES- The Administrator of the Small Business Administration is prohibited from charging any processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, and other fees that may be paid to a loan applicant for the 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 the enactment of this section. The notification requirements of section 553(b) of title 5, United States Code do not apply to the notification of such regulations.
The real question is whether a private bank will lend under this program. Unfortunately, few will do this because the law clearly states that no fees can be charged, and how a bank can make money if they lend under those circumstances. Sure, they could make money in the secondary market, but it dried up, so they were asked to borrow out of the goodness of their hearts. On the other hand, it carries a first 100% government guarantee so that the bank knows that they will receive interest and there is no possibility of losing a penny. Maybe it will work after all.
But there is something else that interests a bank. In a way, this is a form of Federal bailout that goes directly to small community banks. They have on their books loans with no fees and they can easily jump once they get bailed on this program. Especially if they haven’t been the recipients of the first TARP money. Contrary to public sentiment, most of them received no money. But again, this does not apply to community banking. Since they typically package and sell their loans within three to six months, they may not default at that point. It is in the hands of secondary market investors.
So is it good or bad for small businesses? Frankly, it is good to see that some bailout money is moving towards small businesses, but most of them prefer to have a loan in the first place, as opposed to help without payment. Unfortunately, it has limited application.
Wouldn’t it be better if we just expand our small business programs so that more businesses can get loans? What about the SBA creating a secondary market for small business loans? I have a new idea: for now forget defaults, and focus on making business loans available to startups or existing businesses that want to expand.
How about having a program that pays off high interest credit card balances? There’s hardly a business out there that hasn’t financed themselves lately with credit cards, simply because the banks aren’t lending. It’s not unusual for people to have $50,000 plus on their credit cards, just to stay afloat. Talk about saving high interest. You can imagine how much cash flow this can provide to a small business.
We must commend Congress for doing their best under such short notice to come up with this plan. Sure it’s a form of welcome bailout for small businesses, but I believe it misses the mark for most of the 27 million business owners who are just looking for a loan they can pay back, as opposed to a handout.
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