When the SBA backs a loan - they don't do it with money - they do it on paper only. They do not have the funds to put (up to $1MM loans out there). The banks have the money for lending - the SBA only helps this process by guaranteeing the loans.
Example, Bank says they like the borrower but are still not confident of repayment. The SBA steps in (for a small fee) and says we will guarantee. Several months later the borrower defaults. The SBA does not just pay off the loan. The bank still has to foreclose on the business - liquidate any and all assets that it can - use all the options that it does have to collect some of the principle - e.g. personal guarantees - personal assets - personal savings, etc. Once the bank has satisfied all it options in collection - then the SBA will step in to make the bank whole.
Another example, let's say 100 borrowers get approved for $100,000 loans each - that is $10MM out the door. If these are SBA backed (yours and my taxpayers money) - the SBA does 90% guarantees. That $9MM. Let's say 12% default - that's $1,080,000 in default that the SBA has to cover. The SBA does collect fees from the borrower at closing (let's say 3%). 3% on $10MM is only $300,000 - so, where is the SBA to come up with the other 780,000 to cover those 12% defaults.
I understand your frustration - but you have to understand the whole process. The SBA does not have the funds to make direct loans. And, if it did, those loans would actually be much harder to get than traditional banks loans - as the government would have numerous more rules to qualify.
Business Money Today
They had over $1 TRILLION to lend directly to big players. I don't buy the argument that the SBA/government doesn't have the money.
Add - to the big players who have no propensity to run a successful business model.
After supposedly having all the qualifications in the world and all the financial backing anyone could ever dram of, they still managed to destroy hundreds of companies by their inabilities to the tune of billions of dollars in losses with no hope of survival unless WDC loaned them funding.
Surely, the people here can't be that drastically underqualified to manage something on a drsatically smaller scale.
Or maybe they are...
Food for thought. Trying to enhance my understanding.
With exception of disaster loans, the SBA is not set up to lend. They don't have the infrastructre to do what hundreds of small banks do collectively, which is to screen, underwrite, fund, and service all those loans. It's probably more accurate to think of the SBA as the borrowers rich uncle who agrees to guarantee the debt, as opposed to thinking of the SBA as a lender.
As Phanio mentioned, the SBA only pays the lender once a loan is 60 days past due. So when someone says there are $500 Million in SBA loans out there, it doesn't mean the SBA has laid out $500 Million.
The mission of the SBA is to incent banks to lend to borrowers who do not meet traditional lending criteria. The premise is not a whole lot different than "sub-prime" mortgages, which also were made to borrowers whose repayment ability was in questions. The big difference between the SBA program and sub-prime mortgages is that if the business flourishes...it created jobs, puts money into the economy, and all the stuff.
Somebody posted that SBA delinquency rates are at 12%. I wondered what the historic averages are so I could get a better perspective on what that number really means.
I also read recently that removing the banks from the SBA process may be a good way to leverage funding for small businesses.
The banks are so fearful right now that it seems SB owners have to be bulletproof to even get a look.
If the government backs the loans anyway, at least the 90% of them that they now will cover on some, why do we even need a bank to take the "risk" of the loan?
If the SBA became a direct lender, say for loans up to $1million, wouldn't they accept just about the same risk they do now with the bank as their agent?
It ssems to make sense. Why add what has now obviously become an unnecessary layer to the process?
The government certainly knows how to lend money - look at the billions in loans the players have received recently.
Let's bring that here to the SB level and stop the nonsense of adding steps that simply do not need to be taken to achieve the same results.