Pushing 'Government Shutdown Loans' to Gridlocked Businesses

Since the partial shutdown of the federal government began two weeks ago, small business lending has been on shaky ground. The shutdown has likely stalled more than $100 million a day in loans backed by the Small Business Administration. There’s also evidence that banks pulled back on other types of small business loans. Lenders say they’re doing their best to help small business owners caught in the impasse.

“We’ve been telling business owners, ‘Don’t let this stop you from planning to grow,’” says Don Mercer, who heads SBA lending at San Francisco-based Bank of the West. For the bank, that means continuing to process applications, which have been accumulating in the SBA’s electronic queues. It’s also meant helping to overcome a specific sort of shutdown-related wrinkle that’s placed some borrowers at risk of losing deposits on commercial real estate acquisitions.

Some borrowers using the SBA’s 504 loan program have put down cash on real estate deals, says Mercer, but find themselves waiting on financing as the purchase date approaches. Sellers are usually willing to negotiate in such cases, especially given the extenuating circumstances represented by the shutdown. In at least one or two instances, Mercer expects Bank of the West to take the unusual step of funding “interim loans to make sure that the customer doesn’t lose their money.”

Doug Naidus, chief executive officer of alternative financing company World Business Lenders in New York, also saw demand for bridge loans during the crisis. In the normal course of business, the company often lends to small businesses waiting on SBA financing, Naidus says. As the government shutdown stretched on, the company started seeing greater demand for its loans, which typically come with interest rates in the “high teens or low twenties.”

To attract more gridlocked customers, the company said it would offer a “Government Shutdown Loan,” fashioned as a three- to six-month financing for borrowers that already have SBA approval. Naidus says his company is getting “dozens of calls a day” from business owners interested in the loans.

David Goldin, CEO of New York-based alternative lender AmeriMerchant, has also seen an uptick in demand during the shutdown. “People are coming in considering alternative financing, especially with the fourth quarter coming up for people in the retail business,” he says, alluding to the critical holiday shopping season.

Greater reliance on expensive credit worries Mark Pinsky, CEO of Opportunity Finance Network, a Philadelphia-based trade group for Community Development Financial Institutions, which specialize in lending to low-income borrowers. “When small business lending dried up in the Great Recession, we had a surge of alternative lending,” some of which offers predatory terms, he says.

If Congress fails to prevent the country from defaulting, banks will have bigger concerns than making small business loans. As the spigot tightens, Pinsky says, lenders with “high-priced credit and onerous terms” will prey on struggling business owners. On a positive note, CDFIs, which charge lower rates than most alternative lenders, would also see increased demand, says Pinsky: “People are already starting to get calls saying, ‘Hey if I need you, will you be there?’”