For several years, small businesses have become increasingly reliant on credit cards as a major source of financing for purchases large and small and sometimes even to keep their doors open. This trend, exacerbated by the current economic crisis felt around the world, has had a trickle down effect from banks to business, as borrowers become less creditworthy and banks tighten their lending criteria to protect their already stressed balance sheets.
According to the National Small Business Association, 59% of small business financing in 2009 has come from credit cards, 45% from bank loans, 19% from private loans made by family or friends, and 5% from the Small Business Administration.
At a Senate Committee on Small Business and Entrepreneurship hearing convened Thursday to explore the impact of the American Recovery and Reinvestment Act on small business and alternative sources of financing for entrepreneurs, Susan Sobbott, president of American Express OPEN, said that in 2009 her company has authorized more than $2 billion in charges per week to small and minority-owned businesses.
“We’re doing everything we can to continue to keep our credit available to facilitate the spending of small business. In particular we’ve done a lot to help women business owners and have a women’s business initiative where we have many advocates and through that we are touching many minority owned businesses,†said Sobbott. “We work consistently with a micro loan for women owned businesses and also have government contracting work that we do to try to assist women-owned businesses, again many of them minorities.â€
American Express found in a survey of small business owners that 38% said they’re having trouble making their payments on time and that’s one of their key worries. “The reason is their customers aren’t paying them on time so that’s creating this gap in cash flow,†said Sobbot.
SBA administrator Karen Mills had some positive news to share during her hearing testimony.
The SBA received $730 million in recovery funds, $375 million of which was provided to increase, if only temporarily, loan guarantees and to reduce or eliminate fees on certain 7(a) and 504 loans. Mills testified that since the recovery act’s passage, the average weekly loan volume is up 28% in the 7(a) program and 22% n the 504 program. A recent Urban Institute study found that 22% of those loans have gone to minority-owned businesses.
“This increased lending is partially due to the fact that lenders are returning to these loan programs, or in some cases, participating for the first time. More than 1200 lenders have approved 7(a) loans as part of the recovery act,†said Mills. She added that 360 of those lenders had not made a loan since October 2008 and almost half had not made a loan since 2007.
Marianne Garvin, president and CEO of the Community Development Corporation of Long Island, testified that the SBA’s increased loan guarantee was the deciding factor in a loan her organization recently made that under different circumstances would have been denied. Still, she added, its delinquency rate has increased from an average of 2% in 2007 to a current rate of 25% and market conditions have resulted in a deteriorating portfolio. The organization was forced to put a three-month moratorium on lending to work with its troubled borrowers.
Under current SBA rules, the organization’s technical assistance grant could be reduced in the next fiscal year, which will make it more difficult to expand lending and service existing borrowers. Garvin suggested that organizations such as hers should receive the same consideration and assistance that larger lenders have to keep capital flowing.
The recovery bill also included a provision for $50 million in loans to micro-lending intermediaries and $24 million in technical assistance to accompany the loans on top of the funds already budgeted for the agency’s micro-lending program. The SBA, said Mills, is working to attract new micro-lending partners to broaden the program’s reach.
In addition, $255 million has been allocated to a new America’s Recovery Capital, or ARC, program to provide loans of up to $35,000 to help “viable†small businesses experiencing financial hardship.
ARC loans can be used to pay interest and principal on existing non-SBA debt for up to six months. Mills said she expects there will be a high demand for ARC loans and the SBA will provide more details on it during the National Small Business Week conference that begins next Monday.
Bill Bynum, CEO of the Enterprise Corporation of the Delta/Hope Community Credit Union, based in Jackson, Mississippi, suggested that the SBA make operating lines of credit eligible for guaranty under the SBA’s 7(a) program and that it should make community development financial institutions eligible for certification as SBA lenders. He said the latter would substantially increase the ability of CDFIs to expand the use of SBA programs in underserved markets and provide additional liquidity for them through the sale of guarantees on the secondary market.
“I think it’s important that the Senate is looking at alternative financing sources because historically minority businesses have not had as much access to mainstream financial institutions as traditional non-minority companies. CDIFs have been much more successful in routing credit into minority communities,†Bynum said after the hearing.
“It’s important that the committee looks at alternate sources such as these and provide capital not just to large banks that aren’t going to and historically haven’t lent in these
communities, and that when the economy starts to revive, aren’t going to all of a sudden start doing something they haven’t done before, but also look at financial institutions that have as a priority serving all Americans, not just those who live in affluent communities or may fit a certain formula.â€He added that community banks have frozen credit while waiting for the economy to revive.
“While they’re waiting, small businesses are going without critical capital. So it’s really important to look at credit unions, CDIFs, and minority banks and see how we can increase their ability to lend to these communities,†Bynum said.
“If [government] is serious about an equitable recovery, they’ve got to look at financial institutions that have it as a priority to lend to historically distressed and underserved communities like minorities, women and rural areas.â€
While any efforts to increase funding are welcome, small businesses, particularly those owned by minorities, have expressed anxiety over their ability to get their fair share of prime and subcontracting opportunities.
In response, Mills said, the SBA plans to provide an online listing of subcontracting opportunities through the recovery act and has increased the maximum contracting amount from $2 million to $5 million so that small businesses that might not otherwise qualify can compete for larger value recovery act and other projects.