SBA Loan Development

The Small Business Administration ended its 2009 fiscal year on Wednesday, marking the close of a tumultuous year of lending initiatives to keep banks’ doors open. Despite the efforts to revive the credit market, the SBA approved less than 45,000 loans, down 36% compared to last year and 56% from 2007.

The loan volume reflects all the small business loans approved by lenders that are guaranteed by the government under the SBA’s flagship 7(a) lending program. In addition to the drop in number of loans that were approved to small businesses, the total dollar amount also fell drastically to $9.3 billion total, falling short of last year’s total by about $3.4 billion.

Lending, however, appeared to rebound in the later part of the year, which the agency attributes to stimulus-related efforts. “We had a big finish to the fiscal year,” says SBA spokesman Michael Stamler. “Dollar volume for the [7(a) loans] in September was the highest recorded since August 2007.”

Broken down, the 2009 quarterly loan numbers (see interactive chart, at bottom) reveal the complete story of the year following September 2008, when Lehman Brothers filed for bankruptcy. The secondary market, where banks had typically sold their SBA loans to investors in order to initiate new loans, came to a standstill. According to the January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, about 70% of banks had tightened their standards on small business loans. As a result, the SBA backed 57% fewer loans in the first quarter of the year.

In February – six months into the fiscal year – the Recovery Act passed. The stimulus legislation dropped fees associated with the loans and raised the maximum guarantee on the loans to 90%, meaning that if the borrower defaulted, the government would reimburse the bank up to 90% of the loss.

Lending remained down in the third quarter of the year, the first full quarter following the stimulus. Top-tier lenders, including CIT and J.P. Morgan Chase, had reduced their small business lending considerably.

However, crediting the stimulus measures, the SBA reported that lending activity had started to pick up and that hundreds of lenders who hadn’t made a 7(a) loan in months had jumped back into the game.

“We saw many more banks increasing their SBA loans,” says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. “The stimulus provisions helped jump-start the interest in SBA lending.”

Fast forward to the last quarter of the year, ended this week, where more than 15,000 loans totaling $3.3 billion were approved in the last three months – up 18% from the year prior and nearly hitting 2007’s quarterly levels.

“The real turning point was the Recovery Act,” says SBA spokesman Jonathan Swain. “When you look at the data since February, I think we can say that the Recovery Act hit the mark when it comes to SBA lending.”

The lending volume boost in the second half of the year was also due to the revival of the secondary market, which was supported by a program called the Term Asset-Backed Securities Loan Facility, or TALF.

The TALF initiative, which kicked off in March, allowed secondary-market investors to take out loans from the government to start purchasing asset-backed securities, such as SBA loans. Although investors have taken only a small amount of money from TALF to buy SBA loans, the program restored confidence in the market, which has since recovered.
“The TALF program had a very small but positive effect on the secondary market,” says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. “[The market] largely corrected itself and credit started flowing more.”

That means more SBA loans are available for new business to get off the ground and for existing businesses to grow. Take Scott Harris, for example, who owns Catoctin Creek Distilling Company LLC in Purcellville, Va. with his wife, Becky. On Wednesday, the last day of the fiscal year, they signed on the dotted line for a 7(a) loan that will help them start their spirits business.

“We started looking at the banks in June,” says Mr. Harris, who credits the couple’s ability to secure a loan to a solid business plan, robust credit score and a significant amount in personal savings invested in the the business. The four-month waiting game has been “exciting and terrifying,” he says.

The couple procured the loan, which Mr. Harris says was for more than $100,000, with their local BB&T branch. The money will be split between startup purchases such as equipment, and working capital to grow the business.

Still, a jump in the year-over-year numbers doesn’t necessarily mean the trend will continue on an upward trajectory. While conditions are better today, the July 2009 Senior Loan Officer Opinion Survey shows that 36% of banks reported tightening credit standards for small firms in the last three months. Only 2% reported standards easing somewhat.

Furthermore, many lenders who historically have been stalwarts in the SBA lending arena remain hesitant to make small business loans. CIT, the top lender in 2008, has fallen to number 13 and is still teetering on the brink of bankruptcy.

“Where we are today compared to February is encouraging but no one in the administration will say we should declare victory,” says the SBA’s Mr. Swain. “Going forward one of the things we are doing with real urgency is looking at what is needed in marketplace today in terms of access to capital. The main focus is what we can do to keep moving in a positive direction.”

One measure that may help, says Mr. Merski, is pushing the end date for the stimulus programs. While the no-fee and 90% guarantee provisions are set to expire on September 30, 2010, the SBA estimates that funding is expected to run out by December, cutting the end date short. “[Lenders are] 100% behind extending the date as we’re turning the corner,” he says. “If they are pulled back in, we could have a dip in lending. I think that’s going to be a huge factor as to whether this strong uptick in the final quarter of 2009 will continue.”

Courtesy The Wall Street Journal, Emily Maltby