Tough Year for Small-Business Lending

By PlanetLaundry staff | Oct 02, 2009

This year, the government's top small-business lending program offered loans to 25,000 fewer entrepreneurs than it did last year.

In its 2009 fiscal year, which ended September 30, the Small Business Administration backed 44,221 loans from banks to help borrowers start and expand their businesses. That's 36 percent fewer loans than the SBA's 7(a) loan program made in 2008.

The program's total dollar volume also dropped sharply. Loans for this year totaled $9.3 billion, according to preliminary data – down 27 percent from last year's $12.7 billion.

The SBA offers banks guarantees on the money they lend to qualifying small businesses: If the borrower defaults, the government pays the bank back for a portion of the loan. But applicants still have to persuade a bank that they're creditworthy, and lately, that's been an especially daunting challenge.

SBA officials point to one silver lining in their data: After hitting bottom late last year, the loan numbers have been slowly rebounding.

In February, as part of the stimulus package, Congress allocated $730 million for the SBA to bolster new lending incentives. The agency temporarily waived its fees and increased the guarantees it offers banks on 7(a) loans. That helped motivate 1,200 lenders that had gone dormant to resume lending.

This year's lending hit its lowest point in January, when the 7(a) program processed loans totaling $484.4 million, down 48 percent from January 2008. In April – after the Recovery Act provisions took effect – loan volumes noticeably picked up, and September was the SBA's best month of the year, with $1.3 billion lent.

But the big-time players in the small-business market have taken a big step back. Among 2008's top 10 SBA lenders, only Wells Fargo increased its lending this year, while the rest cut their loan volume by 30 percent or more. CIT Group, last year's leading lender, teeters on the edge of bankruptcy, while Temecula Valley Bank, last year's 10th-largest lender, was shut down by its regulators in July.

SBA Programs Receive Extension

Earlier this week, Congress passed legislation to ensure that critical SBA programs and services, including the SBIR Program, continue operating. The bill extends all of the SBA programs currently scheduled to expire on September 30 through October 31, 2009.

In addition to keeping various SBA initiatives operating, the bill would make two important changes to SBA programs to improve small businesses’ ability to access capital.

First, the legislation that the House passed strengthens the America’s Recovery Capital (ARC) loan program, an interest-free loan measure that was created through the American Recovery and Reinvestment Act. As currently crafted, proceeds from ARC loans, which can total $35,000, cannot be used to pay down debts on existing government-guaranteed loans like the 7(a) program. By allowing ARC loans to be used for this purpose, the bill would make more firms eligible for the program, opening up $360 million in capital for small businesses.

In addition to modifying the ARC loan program, the bill would make changes to the New Market Venture Capital program, a long-standing initiative that helps steer capital to the smallest businesses located in economically distressed areas. The legislation would streamline the program’s rules so that the nation’s smallest firms can raise more capital through the program.