Business owners could face a new credit squeeze as early as next month, in what amounts to a gap period between the expiration of two popular stimulus provisions and the ramp-up of President Barack Obama’s plan to boost loans for small companies.
To be sure, the stimulus provisions – which lured hundreds of banks back to the small-business lending arena – could survive past late November or December, when funding is expected to be depleted. On Thursday, the House voted to continue the measures until September 2011. The Senate has yet to consider the legislation.
The stimulus provisions, which allowed the Small Business Administration to drop fees and boost its maximum guarantee on loans to 90%, bolstered lending levels and attracted more than 1,260 lenders that hadn’t made SBA loans since October 2008.
In anticipation of their expiration, Mr. Obama outlined a new plan last week allowing community banks to tap TARP funds for small-business lending. The initiative also would increase ceilings on SBA loans. But the problem, those in the lending industry say, is that there isn’t enough overlap between when the stimulus measures end and when Mr. Obama’s plan – scheduled to roll out by the end of the year – kicks in.
“We’re entering into an era of uncertainty,” says Bob Coleman, founder of Coleman Publishing, a firm in La Canada, Calif. that tracks and reports government-guaranteed lending activity. Previous government programs, including last summer’s emergency-loan ARC program, have taken time to ramp up, as banks must evaluate the rules and – if they decide to participate – prepare their internal systems to support it. Even if Mr. Obama’s plan successfully launches by year’s end, there could be a dip in SBA lending for weeks or months until risk-averse banks engage, Mr. Coleman says.
The SBA and senior administration officials say the programs are part of a collective effort to reinvigorate small-business lending. “While we’ve been able to accomplish a lot with the Recovery Act and engineer a turn around in SBA lending, it will involve really a multi-pronged effort, not just one program replacing another,” says SBA spokesman Jonathan Swain.
Banks, however, say they’d have more incentive to try the new plan if the stimulus measures – in particular, the 90% guarantee – could be extended and act as a safeguard while they adapt to the new rules and regulations. Once the stimulus funding is exhausted, the fees would return and guarantees on loans would drop back to a maximum of 75% for loans more than $150,000.
The stimulus provisions “helped us from a liquidity standpoint,” says Keith Ward, president and chief executive of United Central Bank in Garland, Texas, one of the top 20 lenders in the country by SBA loan volume. “I think it’s too early to stop this program.”
Bob Polito, director of government-guaranteed lending at Webster Bank in Waterbury, Conn., a smaller SBA lender, agrees. “Although bank volume was down in SBA lending, can you imagine how much worse it could have been without the stimulus?”
Whether the stimulus provisions are extended could come down to the price tag. According to the SBA, extending the stimulus measures until September 2010 – about half the time the House bill proposes – would cost $479 million.
“We know it’s an expensive program, but having that extra percentage guarantee is huge,” says Cece Mitchell, senior vice president at Zions Bank in Salt Lake City, one of the top 10 lenders in the country by SBA volume. “Banks are risk-averse and more comfortable if, say, there’s one change in three months, and maybe another change in three months and another change in three months, rather than all at once.”
At United Central, Mr. Ward has high hopes that the stimulus program will receive additional funding. “It’s too early to think that everything is resolved,” he says. “It should go on for at least one more year and let the economy recover a bit more.”
Write to Emily Maltby at firstname.lastname@example.org