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As we continue to dutifully sift through the more than 1,000 pages of the stimulus bill (the American Recovery and Reinvestment Act of 2009), there’s one provision that isn’t getting much attention, but could be very helpful to small businesses. It is possible If you’re a small business and you’ve gotten an SBA loan from your local banker but are having trouble making the payments, you can get a “Stabilization Loan.” This is correct; Some of the bailout money ends up in the hands of the small business owner instead of going down the proverbial deep hole of the stock market or big banks. But don’t get too excited. This is limited to very specific instances and is not available to most business owners.
There are some news articles that boldly claim that the SBA will now offer relief if you have an existing business loan and are having trouble making payments. This is not a true statement and needs to be clarified. As seen in more detail in this article, this is incorrect because it applies to distressed loans made in the future, not existing loans.
Here is how it works. Let’s say you’re one of the lucky few who found a bank to take out an SBA loan. You go on your merry way but run into tough economic times and find it difficult to make ends meet. Remember that these are not traditional loans, but loans from an SBA licensed lender that are guaranteed by the US government through the SBA on default (between 50% and 90% depending on the loan). Under the new stimulus bill, the SBA can come to your rescue. You will be able to get a new loan that will pay off the existing balance on extremely favorable terms, buying more time to revive your business and get back in the saddle. Sound too good to be true? OK, you be the judge. Here are some features:
1. Does not apply to SBA loans taken out before the stimulus bill. With respect to non-SBA loans, they may occur before or after the bill’s enactment.
2. Does this also apply to SBA guaranteed loans or non-SBA conventional loans? We don’t know for sure. The statute simply states that it applies to “a small business concern that meets the eligibility standards and section 7(a) of the Small Business Act” (section 506(c) of the new Act). It contains pages and pages of requirements that may apply to both types of loans. Based on some preliminary reports from the SBA, it appears this applies to both SBA and non-SBA loans.
3. These funds are subject to availability in Congressional funding. Some people think that the way we are going with our federal bailout, money is running out in front of the economy we are trying to save.
4. You don’t get this money until you are a viable business. Boy, you could drive a truck through that phrase. Our friends at the SBA will determine if you are “viable” (imagine how mortified you will be when you have to tell your friends that your business was determined by the federal government to be “non-viable” and on life support).
5. You are experiencing “immediate financial hardship.” So much to hold off on paying as you will be using the money for other expansion needs. How many months you’ll have to be delinquent, or how close your foot is to the banana peel of complete business failure, is anyone’s guess.
6. It is not certain, and commentators disagree, whether the federal government will finance the loans from taxpayer dollars through the SBA or by private SBA licensed banks. In my opinion it is the latter. It’s 100% SBA guaranteed and I wouldn’t mind if the government itself was giving the loan.
7. Loan cannot exceed $35,000. Will probably have to “take out” the new loan or refinance the entire balance on the old one. So if you had a $100,000 loan that you’ve been paying on time for years but now you owe $35,000 and you’re in trouble, do we have a program for you? Or you may have a small loan of $15,000 and need assistance after a short period of time. The law doesn’t say you have to wait a specific period, so I think you can default after the first few months.
8. You can use this to offset monthly delinquencies over six months.
9. The loan will be for a maximum period of five years.
10. The borrower will pay absolutely no interest for the tenure of the loan. Interest may be charged, but it will be subsidized by the federal government.
11. Here’s the great part. If you get one of these loans, you won’t have to make any payments for the first year.
12. Absolutely no advance fee is allowed. Availing such a loan is 100% free (of course you need to pay the principal and interest after the moratorium of one year).
13. SBA will determine whether collateral is required. In other words, if you have to place a lien on your property or residence. My guess is that they will relax as per this requirement.
14. You can avail these loans till September 30, 2010.
15. Because this is emergency legislation, within 15 days of signing the bill, the SBA must come up with rules.
Here’s a summary of the actual legislative language in case you’re having trouble sleeping:
sec. 506. Business Stabilization Program. (a) In general—subject to the availability of appropriations, the Administrator of Small Business Administration shall operate a program to provide loans on a deferred basis for viable (such period as may be determined by regulation by the Administrator of Small Business) is) Administration) Small business concerns who have a qualified small business loan and are experiencing immediate financial hardship.
(b) Qualified Borrower – A small business concern as defined under section 3 of the Small Business Act (15 USC 632).
(c) Qualified Small Business Loan – A loan made to a small business concern that meets the eligibility standards in section 7(a) of the Small Business Act (15 USC 636(a)), but does not include a loan guarantee (or loan guarantees) shall not include commitments made by the Administrator prior to the date of commencement of this Act).
(d) Size of loan – The loan guaranteed under this section cannot exceed $35,000.
(e) Purpose- Loans guaranteed under this program shall be used to make periodic payments of principal and interest on existing qualifying small business loans, either in whole or in part, for a period not to exceed 6 months.
(f) Loan terms- Loans made under this section:
(1) take 100 percent guarantee; And
(2) Fully subsidized interest for the period of repayment.
(g) repayment.—Repayment for loans made under this section—
(1) be amortized over a period not exceeding 5 years; And
(2) shall not commence until 12 months after the last disbursement of funds.
(h) Collateral – The Administrator of the Small Business Administration may accept any available collateral, including subordinate liens, to secure loans made under this section.
(i) Fees – The Administrator of the Small Business Administration is prohibited from charging any processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, and other fees that may be charged to the loan applicant for the loan can be taken. under this section.
(j) Sunset—The Administrator of the Small Business Administration shall not issue loan guarantees under this section after September 30, 2010.
(k) Emergency Rulemaking Authority – The Administrator of the Small Business Administration shall issue rules under this section within 15 days after the date of enactment of this section. The notice requirements of section 553(b) of Title 5, United States Code, shall not apply to the promulgation of such regulations.
The real question is whether any private bank will lend under this programme. Unfortunately, few people will do this because the law states very clearly that no fees can be charged, and how can anyone make money if a bank makes a loan under those circumstances. Sure, they can make money in the secondary market, but that has dried up, so they are basically asked to borrow out of the goodness of their hearts. On the other hand, it has the first ever 100% government guarantee, so the bank knows that they will receive interest and there is no chance of them losing a dime. Maybe it will work after all.
But there is something else that would be interesting to bank on. In a way, it’s a form of federal bailout that goes directly to small community banks. They have loans in their books that are in default and they can easily jump at the chance of being able to salvage them with this program. Especially if they have not been a recipient of TARP money in the past. Contrary to public sentiment, most of them did not receive any money. But again, this may not apply to that community bank. Since they typically package and sell their debt within three to six months, it probably won’t even be in default during that time. This would be in the hands of the secondary market investor.
So is it good or bad for small businesses? Frankly, it’s good to see some bailout money working its way out to small businesses, but most of them would prefer to have loans in the first place, as opposed to aiding defaults. Unfortunately, this would have a limited application.
Wouldn’t it be better if we just expanded our small business programs so that more businesses could get loans? What is the idea of the SBA creating a secondary market for small business loans? I have a new idea: forget about defaults for the time being, and focus on providing business loans for start-ups or expansion of existing businesses.
How about a program that can pay off high interest credit card balances? There is hardly a business that hasn’t been financing itself through credit cards lately, simply because banks aren’t lending. It’s not uncommon for people to have over $50,000 on their credit cards just to keep afloat. Talk about saving high interest. You can imagine how much cash flow this would provide to a small business.
We must commend Congress for doing their best under short notice to come up with this plan. Certainly this is a form of welcome bailout for small businesses, but I believe it misses the mark for the majority of the 27 million business owners who are simply looking for a loan they can repay. As opposed to a Handout.
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