Beware of Unintended Consequences

Entrepreneurs have hardly been overwhelmed by government efforts to help them weather the current economic storm. So some may have cheered on Oct. 20 when the Small Business Administration asked lenders in its 7(a) and 504 programs to cut struggling business owners a break. Specifically, SBA encouraged lenders to extend three-month loan payment deferments to struggling borrowers. And SBA also asked lenders to think twice about calling a loan right away if, for example, the value of collateral backing that loan had fallen significantly.

And it's likely many banks will respond to SBA's nudge. After all, the federal government is coming to the rescue of banks via the current bailout package. But there's a risk. If SBA lenders have to cut deals for delinquent borrowers, will they be less likely to make those loans in the future? Charles Wendel, president of New York City-based Financial Institutions Consulting, a consultant to the banking industry, puts it this way:

I think a lot of banks will bend under that pressure in order to placate the government and to appear to be good corporate citizens. But there is an unintended consequence. It could undercut lenders' enthusiasm for using the SBA system.

Still, the move could allow some struggling companies to hang on until things improve. The long-term implications are less clear. Like most aspects of the current crisis, there are no easy answers.