“I don’t really see any way coat tail businesses, like mine, will benefit from all this stimulus funding,” said one financial planning attorney recently. He speaks for an army of professionals and small businesses. While such firms have provided 70 percent of the nation’s new hires this past decade, their owners see no direct path leading from New Jersey’s $17.4 billion ARRA funds to their own wallets.
Now the administration is seeking a way to make the long reach from the Capitol coffers to Main Street. On March 16, President Obama and Treasury Secretary Geithner announced plans to unlock credit for small business. Part of the administration’s Consumer and Business Lending Initiative, the plan is designed to jumpstart credit for small companies by purchasing $15 billion in aftermarket securities. Barely three weeks old, this has already come under fire from opponents across the aisle as heavily immeshed in Washington bureaucracy. The Small Business Administration, however, insists that the many-pronged initiative is right on target. And since they will be administering the plan, they are taking every effort to make it clear and inclusive to owners. A summary lies below. For full application forms and details visit www.sba.gov.
* Unclogging Credit. It’s no secret that banks for years have increasingly relied on the very liquid secondary market to exponentially expand loan capability. By pooling loans and quickly reselling them to investors as securities, banks have doled out a steady stream of needed funds for company payrolls, expansions, etc. Now that those aftermarket investors have vanished, the credit crunch has worked its way back to the small borrowers who are wondering exactly where their next payroll is coming from. Meanwhile, they watch seemingly all the Recovery Act cash being showered on Fortune 500 firms and state governments. While the smaller firms may survive off these big player’s coat tails, there appears little apparent ARRA trickle down.
The administration’s immediate solution is to re-ignite the credit markets by, in essence, making the Treasury Department the securities investor. Banks, should, they figure, be more willing to extend credit, knowing that the fed backs the loan. The hope is that this will help raise last year’s $10 billion in SBA guaranteed loans back up to its normal annual level of $20 billion.
* Jumpstarting 7(a) Loans. Named after section 7(a) of the Small Business Act, this is the most basic, and most used type of loan the SBA makes to businesses. It is a favorite of startups and those buying a small business. Typically, a local bank loans a business borrower up to $2 million, on the strength of an SBA guarantee of $1.5 million repayment in case of default. Based on sheer numbers, these 7(a) loans have become vital to the nation’s economy.
Under the new initiative, beginning March 31 the U.S. Treasury will buy up securities of 7(a) loans, packaged back to July 1, 2008. This should unclog the backlog of non-producing paper that came with last year’s credit crisis. Further, between now on the end of 2009, the Treasury has committed $15 billion to purchasing new securities comprised of 7(a) loan packages.
For Businesses seeking SBA-backed loans from their banks, the following new advantages have been added: - Elimination of the up-front loan fees of up to 3.75 percent which get passed along to borrowers. (Rebates for fees back to Feb. 17 are given on this.) - Maximum loan guarantees of up to 90 percent.
* SBA’s 504 Loans. Technically labeled the SBA’s CDC/504 Program, this longer-term, fixed-rate financing tool is used primarily to finance major assets such as land and buildings. It provides a popular avenue for expansion loans. In most cases, the borrowing company puts up 10 percent, a senior lender puts up fifty, and a junior lender lends 40 percent, backed by a 100 percent SBA guarantee. Loans of up $10 million may be made.
The Treasury is also purchasing new 504 packages, in the same manner as the 7(a) loans to recreate their former liquidity and attractiveness to lenders. Additionally, 504 cost of capital is reduced as both the up-front fees, and the traditional Certified Development Company (CDC) fees have been temporarily eliminated.
* Other Borrower Boosters. The IRS has stepped in by establishing a five-year carryback of losses for up to five years for firms of under $15 million in gross receipts. Estimated payments for small businesses have dropped from 110 percent to 90 percent through 2009. And the Recovery Act further allows smaller companies a write off of up to $250,000 for job-creating, qualified investment. Finally, the Recovery Act allows a 75 percent tax exclusion of capital gains for investors in small business who hold their investment for five years.
Any participating lender will help the small business participate in these new programs. This includes entrepreneurs who are starting a business from their home; owners of a new businesses that don’t have the full three years of history traditionally required, and even those who may have been turned down recently by local lenders. For businesses facing economic hardship, the SBA now offers ARC Stabilization Loans of up to $35,000 for immediate loan payment. They are even expanding their Micro lender program.
The current administration is making it quite clear: they do not want your business to fail. The wealth of programs and public strategies are richer than ever. All you have to do is click onto www.sba.gov and mine the possibilities. Biz4
