SBA Urges Banks to Offer Greater Loan Flexibility to Small Firms

The Small Business Administration today urged banks to offer more flexibility to small firms interested in a special long-term loan program as entrepreneurs and established small business owners find it difficult to succeed as sources of credit like home equity loans diminish.

As traditional bank lending tightens in the nation's current economic turmoil, many small firms have been turning to resources offered by the federal government such as the 7(a) loan program, which provides long-term loans for small businesses.

Most U.S. banks participate in the program and must structure these loans according to the SBA's requirements. Both the lender and the SBA share the risk that a borrower might not be able to completely repay the loan.

But the program is troubled. It has seen four consecutive fee increases since 2005. For small and mid-sized loans, the fees were doubled to $3,000, and for larger loans the fee can hit more than $50,000. Small firms received $160 million less through the 7(a) program in the first six months of fiscal 2006 than during the same period the previous year, according to the National Community Reinvestment Coalition.

The SBA today announced that it is "strongly encouraging" participating 7(a) lenders to work with business borrowers to "provide them with the flexibility they need to keep their businesses running during these difficult economic times."

"The SBA is here to help small businesses during these difficult economic times. We are encouraging our lending partners to follow suit by extending three-month payment deferments on their SBA guaranteed loans to qualified borrowers who need relief," said SBA Acting Administrator Sandy Baruah.

The agency also reminded participating lenders that they have the authority on a case-by-case basis to extend temporary payment relief for qualifying borrowers with 7(a) and 504 loans who are struggling to make their payments. The 504 program provides small firms with long-term, fixed-rate financing for real estate and equipment purchases.

The SBA also is asking its lenders not to "broadly call borrower loans due to changing financial variables, such as fluctuations in personal credit scores, declining collateral values, and reduced home equity, which are currently affected by the disruption in the financial markets."

Sen. John Kerry (D-Mass.), who chairs the Senate's Small Business and Entrepreneurship Committee, sent a letter (pdf) on Monday to President Bush urging more support for small businesses.

"Since last November, I've urged this administration to prepare for the looming credit crunch," said Kerry. "In letters and hearings, members of the committee asked the SBA to step up to help small businesses. Despite the extraordinary financial crisis, the agency has been of little help to the very people they're meant to serve."

Kerry cited the problems with the 7(a) program in his letter and suggested that the administration could temporarily reduce fees, make disaster loans available nationwide to serve as bridge loans until the economic rescue package takes effect and adjust the rate cap on the loans temporarily.

He introduced a bill in September that would temporarily suspend the fees that the SBA typically charges its borrowers and banks and noted in his letter to Bush that the SBA has objected to the bill's provisions.

Sen. Olympia Snowe of Maine, who is the top Republican on the Senate small business panel, introduced a bill this month that would create a permanent special task force on financial crimes within the Department of Justice to investigate and prosecute the individuals on Wall Street responsible for the instability in the nation's financial markets.

By Sharon McLoone |  October 20, 2008; 1:01 PM ET Economy Watch , Funding
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