A Congressional panel convened a hearing last week to explore ideas about how to improve the flow of capital to small businesses. Both Democrats and Republicans who sit on the House Committee on Small Business‘ finance and tax subcommittee agree that the levels of commercial and Small Business Administration-guaranteed lending have fallen, exacerbating an already significant challenge for small- and minority-owned firms.
Noting that in previous downturns the SBA has stepped in to help fill in lending gaps, Rep. Kurt Schrader, who chairs the panel, said, “Unfortunately in this recession, the SBA’s capital access programs have been unable to fill their traditional role, leaving many small businesses with few options.†He added that a Federal Reserve survey found that 69% of domestic lending institutions have tightened lending standards and that venture capital has declined by more than 50% for two consecutive quarters.
Speaking on behalf of the American Bankers Association, William Humphreys, president and CEO of Oregon-based Citizens Bank, recommended that the Recovery Act provisions that increase the 7(a) program‘s loan guarantee level and decrease fees for borrowers and lenders be extended beyond the 2010 expiration date.
“The more we’re able to supply additional capital to our country’s small businesses, the better chance we have at keeping businesses alive. … Additional capital through lending will create an environment where small businesses will begin to rehire or add new jobs. Maintaining the 90[%] guarantee, with lower fee levels, through fiscal year 2012 will assist in that effort,†said Humphreys.
He also strongly recommended that when a company defaults on a loan, the SBA and
the lender should work together to restructure the loan so that the company can remain viable. Currently, a borrower must liquidate before a bank can go after the loan guarantee, which may be the reason many lenders are reluctant to participate in the 7(a) program. “A guarantee doesn’t make a bad loan a good loan,†Humphreys said.According to James Ballentine, an ABA senior vice president, the panel is considering including a capital backstop provision in upcoming 7(a) legislation that says that if a borrower goes to a local SBA lender that doesn’t provide a loan, the loan could be offered to a national lender. If the national lender also doesn’t provide the loan, the SBA can do so, which would, in essence, put the SBA in the direct lending business.
Steve Swartzman, a partner in a C3 Capital, which manages two small business investment companies in Missouri, testified on behalf of the National Association of Small Business Investment Companies. SBICs, which are licensed by the SBA, raise private equity funds that are invested exclusively in small businesses.
He advocated for reforms of the SBIC program that would include expanding fund limits and allowing SBICs to stay in the program longer to grow and start new funds larger than their previous fund. “These would-be repeat SBICs that become larger funds are solid investment vehicles with a wealth of experience and significant infrastructures that should be kept in the program,†Swartzman said, adding that funds should not be forced out of the program because of successful small business investing.
He encouraged Congress to increase the number of licensed SBICs across the nation, particularly in areas that need more SBIC coverage.
Carol Wayman, federal policy director for the Corporation for Enterprise Development, applauded the subcommittee’s recommendations to increase the cap on borrowing by SBA microloan intermediaries and the maximum loan size of microloans from $3.5 million to $10 million.
“Many of the highest performing, most capable intermediaries in the microloan program have reached their $3.5 million loan limit and are unable to make additional microloans despite heavy demand,†she said. In addition, Wayman recommended that the SBA and the subcommittee consider eliminating the requirement that prevents intermediaries from operating in more than one state.
“Permitting multi-use state of microloan dollars will facilitate regional economic development, something that is much needed in many parts of the nation,†she said.