The Small Business Administration (SBA) announced it is changing two aspects of its lending programs that the government agency hopes will help increase access to capital for small businesses.
“I’ve been pushing for these changes since May 2007, but the [Bush] administration refused to act and blocked Congress when we tried to do it in a bill,” says Sen. John Kerry (D-MA), chairman of the Senate Committee on Small Business and Entrepreneurship. “After much urging from both sides of the aisle, I’m happy that the SBA has finally decided to step in to provide some relief to small firms.”
One of the changes being made by the SBA would give lenders the discretion to use an alternative variable interest rate to the Prime interest rate. Lenders will now be able to use the London Interbank Offered Rate.
“This change will help more small businesses obtain capital to grow their businesses and create new jobs,” says Sandy K. Baruah, acting SBA administrator. “By allowing both rates, SBA is making its programs more flexible, increasing opportunities to access capital and giving both lending partners and small business customers more options to meet their needs.”
The SBA posted a record year in 2007 with more than 110,000 loans approved. That number dropped by nearly 30% in 2008. The dollar value of those loans declined by 13%, from a combined $20.6 billion in 2007, to $17.96 billion in 2008. The average loan size rose from $142,000 in fiscal year 2007 to $183,000 in fiscal year 2008.
The SBA will also allow loans with various interest rates to be pooled for sale on the secondary market rather than allowing only loans with the same rate to be pooled. The changes are expected to improve small business lending and make it easier for banks to sell the loans on the secondary market.
“The challenge small businesses face today is not the cost of capital, it is access to capital,” Baruah says. “Interest rates are at historically low levels meaning money is inexpensive, yet lenders aren’t lending and borrowers aren’t borrowing. This indicates markets are frozen due to liquidity concerns. This interim final rule is an important step to reenergize the lenders to make SBA-backed loans and will help open the gateway of capital for entrepreneurs.”
Kerry and Sen. Charles Schumer (D-NY), a senior member of the Senate Banking Committee, urged Baruah to implement the changes to make it easier for borrowers and lenders during the harsh economic climate. Loans to small businesses through the SBA’s largest small business lending program are down 53%.
“These are just two of the many changes that the administration can make immediately,” said Kerry. “More help is needed because entrepreneurs can’t wait for the rescue package to reach them.”
“Small businesses are the backbone of our economy and we need to use every tool in the box to ensure that they promptly get the credit needed to survive,” Schumer says. “I thank the SBA for implementing these