Over the last week, there have been many questions regarding the Government's plan to use stimulus money to help small businesses.
There are many business owners or budding entrepreneurs that are under the impression that the proposed $15 billion of the stimulus plan will go directly to small businesses in the form of cheap loans.
That is not the case. The proposed plan will allow the Government to purchase investment grade securities backed by bundles of SBA guaranteed loans to small businesses. This is very similar to the collateralized mortgage obligation (CMO) and collateralized bond obligation (CBO) in the home mortgage industry (ironically enough - it was in part the abuse of these CBOs and CMOs that lead us into our current financial crisis).
If the SBA guarantees a loan for your business, it can pool your loan (facility) with other similarly structured guaranteed loans. These pools of loans are then sold to investors in the secondary market (Here investors can purchase securities that monetize the income streams these loans and bundles of loans produce).
When banks sell these loans to the secondary market - they receive cash that can be lent back out to other small businesses - benefiting the banks, the borrowers, and the investors.
Having said all of that - for your business to participate, it (you) must still be approved by a SBA loan originating bank as well as the SBA. Standards for these loans have really risen over the last year or so. According to the Dallas Morning News, SBA loan defaults rose 154% in 2008. This climbing default rate combined with struggling banks and little activity in the secondary market for these types of securities have really driven new SBA loan originations to a halt. Banks and the SBA are more closely scrutinizing borrowers and tightening standards to better ensure themselves against these losses.
Further, the secondary market for these securities has really dried up. Investors - already hurting for this financial crisis and sliding stock market are either unwilling to take the risk on these securities or just do not have the funds to do so.
Thus, this plan. The government will step in and replace individual investors and purchase the securities back by solid SBA guaranteed loans. The hope is to provide banks the means to originate these facilities, sell them to the secondary market and then relend the proceeds - freeing capital and loans to small businesses. Further, to entice banks to participate in these programs - this plan will also raise the limit of the SBA guarantee to 90% of the loan amount and reduce or eliminate SBA fees for both the borrower and lender - fees used to cover defaults.
While this seems like a great program on the surface (and I really hope it works) many banks are stating that they have reduced their SBA loan programs, not because of fewer requests for these types of loans or a lack of funds but because they have been seeing fewer and fewer "qualified" borrowers for these loans. So, while all other items seem to be in place to help free the flow of funds to growing small businesses - there may still be a bottleneck in the credit worthiness of these borrowers. Plus, as the economy worsens, so will the pool of qualified applicants. (I really hope I am wrong here).
I guess the moral here is - take this time - before starting your business or expanding your operations - to better position yourself and your business for these SBA guaranteed programs. This means improving your credit history, reducing your over all debt, and developing a better plan for the future.
What are your thoughts?