Will Government Encourage More Small Business Borrowing?

The federal government is dealing with a lot of potential issues as a result of the sequestration budget cuts that went into effect some time ago. However, the agency in charge of helping to foster small business growth nationwide seems to have a new idea for how it can carry out its task despite the recent and newly-proposed changes to its budget.

The Small Business Administration is now making a concerted effort to help independent companies across the country by encouraging lenders to extend more credit, according to a report from the New York Times. However, the way in which it is doing so is a relatively new approach: it is asking banks to make smaller loans to smaller businesses. Between 2007 and 2009 alone, small business loans backed by the agency, but for $150,000 or less, had aggregate values fall to $1.4 billion from $3.5 billion.

And while this was also during the recession, when lending declined more or less across the board for all types of credit, the total amount of credit extended to small businesses for these small amounts has not seen an uptick in the total proportion of lending to these borrowers, the report said. Where in 2007 they made up 24 percent of all SBA-backed loans, they later slipped to 9 percent and have held relatively steady at that level since. The SBA would therefore like to see more of this type of lending as a means of encouraging small businesses to expand their operations in some way.

How it plans to do so
Because it appears banks – or perhaps small businesses themselves – are reluctant to enter into these types of borrowing agreements, the SBA is now waiving fees for guaranteeing loans of $150,000 or less, the report said. The hope is obviously that this will encourage banks to start marketing loans of this size to potential independent borrowers.

However, some critics of the move say that this likely won't be enough on its own, simply because fees for other loans under the SBA's 7(a) Express lending program – which lets banks use owners' personal credit standings instead of business-related numbers – are larger in general, regardless of the amount of credit extended, the report said. As such, banks shied away from less considerable loan amounts and instead focused on far larger ones as a means of turning a greater profit on small business lending.

"As the banks have re-entered the market in lending, they're really looking at the business metrics and the business's ability to repay the debt," Jeanne Hulit, an associate SBA administrator, told the newspaper. "And if you're going to do that kind of analysis, it's just as costly to analyze a $1 million loan as a $100,000 loan. So clearly the banks were using their resources to lend to more established businesses, with a more predictive ability to pay."

But the SBA's new plan, which eliminates both the one-time fee when the loan itself is issued and the annual one charged after that, could save banks considerably, the report said. For instance, on a $150,000 loan, the initial fee could come to $2,550, with ongoing annual fees of $825, and therefore having those waived altogether could be quite valuable to banks going forward.

Of course, when it comes to taking out loans to expand their companies, owners might want to consider the effects this type of borrowing will have on their bottom lines, particularly as small business insurance premiums have been rising in the last several years.