Take a number and wait

SBA loans to small business were going like hotcakes lately, but the heat under the griddle just went out again.

The heat was from the American Recovery and Reinvestment Act, which in February 2009 allocated $375 million to the U.S. Small Business Administration to increase its guarantee to banks on 7(a) loans and to reduce the borrower’s fees on most 7(a) and 504 loans.

Those funds were exhausted by November “because it was so successful,” according to Sandy Bloem, president of the Economic Development Foundation, a Grand Rapids-based nonprofit organization that administers SBA 504 loans throughout the state.

Applications were still taken for the SBA loans but if the would-be borrowers wanted to hold out for the ARRA fee subsidy, they were put in a “queue” until Congress approved more ARRA funds for the program. It did that in December, when $125 million was added to the SBA program, and those funds ran out in late February. At that point, according to U.S. SBA head Karen Mills, another $60 million was provided to extend the programs through March. SBA was then authorized for another $40 million in late March and yet another $80 million in mid-April to keep the loan subsidy program going through the end of May.

Now May is gone and so is the ARRA money, again, and the queue is back. Meanwhile, Congress was on a week-long recess last week as the subsidy was expiring.

Bloem said the EDF, which only processes SBA 504 loans, is still taking applications for loans under the ARRA subsidy program, but once approved, the borrower has to wait in the queue in hope that Congress renews the subsidy.

“We’re very optimistic that that’s going to be accomplished within the next couple of weeks,” Bloem said.

Borrowers who need an SBA loan and can’t wait for the renewal of the fee subsidy can go ahead and take out a regular SBA loan, according to Bloem. However, in some cases, the subsidy covering the fee paid by the borrower “can be significant, can be very beneficial to small business,” she said.

In general, the fee is between 2 and 3 percent of the guaranteed portion of the loan, she said. If it’s a $100,000 loan and 75 percent is guaranteed by SBA, the fee would be at least $1,500.

A typical SBA 504 project is typically about a million dollars, according Bloem, which would make the SBA portion of the financing about $400,000.

The ARRA funds used to increase the SBA guarantee on 7(a) loans made them attractive to the banks, too. The usual SBA guarantee to the bank making the loan is a maximum of 75 percent of the loan amount, but the ARRA funds pushed it to 90 percent.

The ARRA incentives, for both the borrowers and the bankers, has “really stimulated business borrowing,” said Bloem.

“The banks are more willing to lend,” said added.

From Oct. 1 through April 30, there were 126 new SBA 504 loans made in Michigan. During the same period a year ago — Oct. 1, 2008, through April 30, 2009 — “there were only 57,” said Bloem.

Long before the ARRA came on the scene, in the period from Oct. 1, 2007, to April 30, 2008 — which was also before the U.S. financial industry nearly collapsed — there were 144 SBA 504 loans made in Michigan.

Banks were very aggressive for a while in their lending, noted Bloem. After the financial crisis, “they did get more conservative, but now, with this fee waiver, I certainly think it helped them lend to their customers more often.”

Bloem said the rates lately have been “fairly attractive” for SBA 504 loans, which are for 20 years and can only be used for the purchase of fixed assets such as real estate. SBA will provide 40 percent of the capital required; the borrower must put up 10 percent and a bank loans the remaining 50 percent. In May, the effective rate was 5.52 percent for a 504.

When asked if borrowers were indicating a willingness to go back to paying the fees covered by the ARRA, Bloem said, “Not at this point.”

Mills said in a late May news release from Washington that, to date, the ARRA stimulus programs for SBA loans “supported more than $27.5 billion in lending to more than 60,000 small businesses across the country. They have also brought more than 1,300 lenders back to SBA’s loan programs.”

Bloem said the hope now is that Congress will “put at least enough money in there to extend it to the end of the government’s fiscal year,” which is Sept. 30.

“Now there is something in front of Congress again,” noted Bloem. “It just hasn’t been approved — it’s been tied to a jobs bill that doesn’t have such widespread support. They’re hoping to get it approved separately.”

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