Unsecured Small Business Loans – Good News – Stimulus Bill Allows SBA 90 Percent Guarantee For Loans

Anyone even remotely involved with small businesses, whether as a consultant, lender, vendor, leasing specialist, trade association, or simply as a consumer who is tired of driving through sections of town and wondering why their favorite business unceremoniously threw in the towel , very like to hear good news. Not to mention the small business owner himself. After all, there are 27 million worthwhile small businesses in this nation that are too often ignored by the Bush administration. Classically, non-complainers by nature just want to be thrown a little hope. And I don’t mean the wide-eyed idealists looking for handouts; with all due respect to Emily Dickinson, they’re not looking for “the thing with feathers that perches in the soul.” Just give us a few bucks and we’ll take advantage of it. This is a continuing article (20 in total) on the topic: Help. Is there anyone out there lending to small businesses more?

Fortunately, there is a loan program and loans are currently being made by SBA lenders: the Community Express Loan Program. This provides unsecured small business loans between $5,000 and $50,000 with very little paperwork, responses usually within two days, interest rates currently at 7.75%, financing and two weeks, and money transferred directly into your business account. There are still lenders participating in this program, even though Congress has failed to make the program permanent and it still has a 10% cap on the amount of loans.

Enter Obama’s stimulus bill. Let’s see how it affects this program and small business loans as a whole.

If you’ve tried to flip through the 1,100 or so pages of the new stimulus bill (the American Recovery and Reinvestment Act of 2009), you know it’s like breaking granite. But let me pull out a little gem. It now allows the US Small Business Administration (SBA for you) to guarantee up to 90% of the loans made by private lenders under its program. Let me explain. This is great for Community Express.

When the Small Business Act was enacted in 1958, it had a very simple mission. Find a way to get small business loans that couldn’t get them through traditional channels. He did it in an ingenious way. They knew that banks were reluctant to lend to small businesses, especially start-ups, for fear of failure. So the SBA collected a fee on each loan and used it as a fund to pay banks in case of default. Bingo, the SBA guarantee fee was invented. You don’t need a rocket science degree from MIT and an MBA from Harvard to know that this gives banks incentives to make more loans.

SBA loan programs have guarantees of 50% to 85%. Specifically, the SBA currently guarantees 85% on loans up to $150,000 and up to 75% on loans over $150,000. 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 collateral will not change). With the new stimulus bill, the SBA has the right to increase these fees to 90%.

Think about it for a moment. Simple math tells us that the higher the collateral, the higher the probability that the bank will grant the loan. For God’s sake, 90% is knocking on the door of a 100% guarantee! Also keep in mind that the collateralized portion is usually sold on the secondary market (which recently closed to almost nothing), so there’s a better chance of loans being sold and more money coming back into the banks’ coffers for additional lending.

Notice I said that the SBA has the right to increase it to 90%. You can choose which program. And it hasn’t happened yet. But if I were a gambling person, I’d say they’d be looking seriously at most programs because they’re all looking for ideas to revive the economy.

For those addicted to primary source documents, this is what the new statute says, in relevant part (my lawyer wanted me to add that):

DRY. 502. ECONOMIC STIMULUS LOAN PROGRAM FOR SMALL BUSINESSES. (a) PURPOSE: The purpose of this section is to allow the Small Business Administration to guarantee up to 90 percent of qualified small business loans made by eligible lenders.

(b) DEFINITIONS – For purposes of this section:

(1) The term ‘Administrator’ means the Administrator of the Small Business Administration.

(2) The term ‘qualified small business loan’ means any loan to a small business pursuant to section 7(a) of the Small Business Act (15 USC 636) or title V of the Small Business Investment Act Companies of 1958 (15 USC 695 et seq.), except for loans made under section 7(a)(31).

There is also a forfeiture provision in Subparagraph (f) that states that warranties are only valid for one year after enactment of the bill, unless extended by Congress.

So what does it do for me now as a small business owner? Well, now the not so good news. I predict that the SBA will increase many of their programs to 90%. But for banks to be willing to lend again, there has to be a secondary market. There is also new legislation in this regard, which we will talk about in another article. But once we have a secondary market, I predict that banks will not just lend, they will lend in a big way. For three reasons:

First, history tells us when there is economic slack mainly due to depressed conditions, when the cycle changes for the better, like a ripple effect, it changes dramatically. Remember when people couldn’t refinance or buy their homes due to market restrictions and high interest rates? Rates dropped and many jumped at the chance to refinance, improve their homes, and buy (some say too rashly) galore. Although this is an exaggeration and also depends on other factors like employment, standard of living, etc., the analogy holds that when things relax, there will be a substantial amount of business lending.

Second, banks are largely in the business of lending and haven’t been for some time. They will be eager to make a profit again.

Finally, simple economics tells us when there is a gap in the market; capital will rush in and take advantage of that open market and initial lack of competition. Big banks aren’t making business loans, so small community banks are starting to rush in to take over the arena. Give them a secondary market and they will explode.

So for a small business owner, I think this 90% guarantee news is favorable. Why did it take so long?