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Credit & Lending

1 Post authored by: CommunityTeam
By Reed Richardson

As part of the economic recovery package passed in mid-February, Congress and the President temporarily relaxed several lending rules and also added more than a billion dollars in additional funding to make loans more accessible and attractive to small companies. These measures are aimed at reversing the significant drop in small business lending that accompanied the larger credit market contraction that began last October. Below is a breakdown of the new stimulus package's effect on various governmental loan programs.

 

7(a) Loans - The most basic and most common type of Small Business Administration loan, 7(a) loans enjoy partial financial backing of the federal government as a way to encourage lenders, also known as participants, to provide capital to small businesses. These SBA guarantees typically range from 50 to 85 percent of the principal, depending on the loan's size and terms. Normally quite popular, the number of 7(a) loans issued plunged by roughly 50 percent during the last three months of 2008 when compared to the same period a year earlier. So, to encourage greater lender participation in 2009 and allay fears about defaults, the recently passed economic recovery package allotted an extra $375 million to the 7(a) and 504 loan programs (for more on 504 loans see below), which will enable the SBA to eliminate loan fees for borrowers on both types of loans and increase to 90 percent its loan principal guarantees on 7(a) loans through the rest of calendar year 2009. And to further revive 7(a) lending, the SBA to will also set up a new temporary loan program that will assist the broker-dealers who purchase 7(a) loans on the secondary market. For more on SBA 7(a) loans, click here: http://www.sba.gov/services/financialassistance/sbaloantopics/7a/index.html.

 


504 Loans - Another popular SBA loan program, 504 loans provide small businesses long-term fixed-rate financing for major capital projects like purchasing real estate or upgrading company infrastructure. Typically, the financing of 504 projects involves a mix of private-sector loans, government-guaranteed loans (often from a nonprofit Certified Development Company), and equity investment from the small business. As mentioned previously, the $375 million allocated to this program by the stimulus package is aimed at encouraging more lending by eliminating throughout the rest of 2009 any upfront loan fees paid by qualified small business borrowers, and in the case of 504 loans, third-party lenders as well.

 


In addition to this money from the economic recovery package, the Treasury Department has also directed that up to $15 billion of the remaining funds from the Troubled Asset Relief Program (TARP) be dedicated to purchasing pooled 504 and 7(a) loans in the secondary market, in an attempt to further loosen the small business lending market.

 

For more general info on 504 loans and mortgages, go to: http://www.sba.gov/services/financialassistance/sbaloantopics/cdc504/index.html.

 


America's Recovery Capital (ARC) loans - A new $225 million program created as part of the economic recovery package, ARC loans are designed to provide a quick, short-term injection of cash flow into small businesses that are struggling to make payments on existing business loans. These deferred-payment loans-companies can wait a full year upon receiving the cash before beginning to repay it-top out at $35,000 and are fully guaranteed by the federal government.

 


Microloans - By providing an additional $30 million to the SBA's microloan program, the economic recovery package will enable up to $50 million to be disbursed in small, community-based loans (like the ARC loans, microloans are capped at $35,000 each). In addition to this money, $24 million in technical assistance grants will also be available for the microlenders. For more background on the SBA's microloan program, go to: http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_microloan_intermediary.pdf

 


Surety Bond Guarantees - An additional $15 million will be provided to expand the SBA's Surety Bond program in an attempt to encourage more small businesses to compete for the economic recovery package's many city, state, and federal projects. To further assist small businesses in competing for these projects, the economic recovery act also raised the maximum qualifying amount on contracts that would qualify for an SBA Surety Bond from $2 million to $5 million. For more on the SBA's Surety Bond Guarantee program, go to www.sba.gov/osg/.

 


Community Development Financial Institution (CDFI) loans - The stimulus package passed this past winter allocated roughly $400 million in additional funding over the next two years to the U.S. Treasury's CDFI Fund, nearly quadrupling 2008's annual federal funding. Not under the SBA's purview, this government money, which is provided directly to lenders in underserved rural and urban low-income neighborhoods, is intended to help stabilize local economies and invest in small businesses that might not otherwise have sufficient access to capital. For more information on CDFIs or to locate one nearby, check out http://cdfi.org/.

 


To find more info on the small business-oriented aspects of the economic recovery plan, go to: http://www.sba.gov/idc/groups/public/documents/sba_homepage/recovery_act_overview_033009.pdf

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