As part of its efforts to stimulate economic recovery, the Obama Administration announced on Oct. 21 a new set of initiatives to help spur lending to small businesses. President Obama headed to Landover, Md., to make the announcement on the premises of Metropolitan Archives, a 13-employee record storage and delivery company seeking expansion capital.
"I know that times are tough and I can only imagine what many of you are going through, in terms of keeping things going in the midst of a very tough economic climate, but I guarantee you this: This Administration is going to stand behind small businesses," President Obama said. "You are our highest priority because we are confident that when you are succeeding, America succeeds."
The initiatives will use the Troubled Asset Relief Program to lower the cost of capital for smaller banks and community development financial institutions that present plans to the Small Business Administration for increased small business lending through the SBA's flagship 504 and 7(a) programs. It will also more than double the maximum size limit of some of its guaranteed loans to small business owners.
Supporting Community Banks "If you want to help small business lending, you have to make special efforts to help banks that are most prominent for small business," said one senior Administration official. The official said that while on average banks with more than $1 billion in assets typically devote about 21% of their commercial loan portfolios to small business loans, community banks with less than $1 billion in assets devote 56%.
Specifically, the SBA, working in tandem with the Treasury Dept., plans to increase the maximum size of its 7(a) loans to $5 million from $2 million. It will also increase the maximum size of its 504 loans, used most typically for purchase of land, buildings, and equipment, to $5 million from their current size limit of $4 million. Microloans, which most typically go to startups or disadvantaged businesses, will jump to $50,000 from $35,000.
"We are applauding these new efforts," said Paul G. Merski, chief economist for Independent Community Bankers of America. "There are huge risks involved in extending small business credit in today's struggling economy; big policy responses and big incentives such as increased government loan guarantees…will be needed to overcome the risks and expand lending."
Acknowledging that the first wave of TARP money primarily helped the largest banks, another Administration official noted new initiatives will lower the rate at which banks can access capital—in some cases to as low as 2%, rather than the current 5% rate. In particular, the Administration wants to focus on helping smaller community financial institutions in rural and urban areas that have been hardest hit by the recession, with unemployment rates of 15% or higher.
Help for Franchisees Philip Ware, president of Celtic Bank in Salt Lake City, expressed optimism about the new program. "[President Obama] wants to do what needs to be done to get money flowing to the small business community, and community banks provide most of the money to the small business community," Ware said, adding the first TARP program was not available to community banks. "It never got down to us," he said. Celtic, which has $210 million in assets, has a 7(a) portfolio of $125 million.
Administration officials noted that the desire to increase the size of the SBA loans was driven in part by meetings with large franchise corporations like Dunkin' Donuts. "What drives them is when they can get top-notch people that want to start four to five franchises at once," the official said. Ware says he thinks this reasoning is sound. "It is not Dunkin' Donuts that will be getting the money, it will be the owner of the franchise out there in Nebraska," he said.
And for nonfranchise businesses like Metropolitan Archives, expansion capital is also critical. Joseph Incarnato, president of the $2 million company, says it secured a $2 million 504 loan, which let it purchase part of the warehouse it is currently in. With revenue on track to grow 38% this year, the company is seeking up to $4 million in another 504 loan to purchase the rest of the building. Metropolitan also plans to add another 10 employees over the next year. "There are small businesses out there that struggle to get funding, and they are viable entities and ready to expand, but this holds them back," he says.
One important issue that has yet to be resolved is what will happen to the loan guarantee increases and fees on the SBA loans. In March, as part of the American Recovery & Reinvestment Act, fees on the 7(a) and 504 loans were cut out and guarantees were increased to as much as 90%. That helped spur about $13 billion in new lending from 1,260 banks and credit unions that had stopped lending when the financial crisis began, Administration officials said. The House is currently debating extending both relief measures.