Small Business Loan Update: Stimulus Bill Helps Rescue Businesses If They Can’t Pay Loans
As we continue to diligently scrutinize the 1,000+ pages of the stimulus bill (American Recovery and Reinvestment Act of 2009), there is a provision that is not getting much attention, but which could be very helpful to small businesses. If you are a small business and have received an SBA loan from your local banker, but are having trouble making payments, you can get a “stabilization loan.” That’s how it is; Eventually, some of the ransom money goes to the small business owner, rather than into the proverbial deep hole in the stock market or big banks. But don’t get too excited. It is limited to very specific instances and is not available to the vast majority of business owners.
There are some news articles that boldly state that the SBA will now give you relief if you have an existing business loan and are having trouble making payments. This is not a true statement and needs to be clarified. As seen in more detail in this article, this is incorrect because it applies to problem loans made in the future, not existing ones.
Is that how it works. Suppose you were one of the lucky few a bank found to make an SBA loan. You continue your joyous path, but you are in tough economic times and it is hard to pay. Remember that these are not conventional loans, but loans from an SBA licensed lender that are guaranteed for default by the US government through the SBA (depending on the loan, between 50% and 90% ). Under the new stimulus bill, the SBA could come to your rescue. You’ll be able to get a new loan that will pay off your existing balance on extremely favorable terms, allowing you more time to revitalize your business and get back in the saddle. It sounds too good to be true? Well, you are the judge. These are some of the features:
1. Does not apply to SBA loans obtained before the stimulus bill. As for non-SBA loans, they can be before or after the bill’s enactment.
2. Does it also apply to SBA guaranteed loans or non-SBA conventional loans? We do not know for sure. This statute simply says that it applies to a “small business that meets the eligibility standards and section 7 (a) of the Small Business Act” (Section 506 (c) of the new Act). It contains pages and pages of requirements that could apply to both types of loans. Based on some of the preliminary SBA reports, it appears to apply to both SBA and non-SBA loans.
3. These funds are subject to availability in the funding of Congress. Some think that the way we go with our federal bailout, we are going to run out of money before the economy we are trying to save.
4. You don’t get this money unless it is a viable business. Wow, you can drive a truck with that phrase. Our friends at the SBA will determine if you are “viable” (imagine how inferior you will be when you have to tell your friends that the federal government determined that your business was “unviable” and on life support).
5. You must be experiencing “immediate financial hardship.” Too much to delay payments because you prefer to use the money for other expansion needs. How many months you have to be a criminal, or how close your foot is to the banana peel of total business failure, is anyone’s guess.
6. It is not certain, and commenters disagree, as to whether the federal government through the SBA will make the loan with taxpayer dollars or with private banks authorized by the SBA. In my opinion it is the latter. It is 100% guaranteed by the SBA and it would not make sense if the government itself were making the loan.
7. The loan cannot exceed $ 35,000. Presumably the new loan will “take out” or refinance the entire balance of the old one. So if you had a $ 100,000 loan that you have been paying on time for several years, but now you have a $ 35,000 balance and are in trouble, we have a program for you. Or you may have a smaller loan of $ 15,000 and soon need help. The law doesn’t say that you have to wait for a particular period of time, so I assume you could be in default after the first few months.
8. You can use it to offset no more than six months of monthly delinquency.
9. The loan will be for a maximum term of five years.
10. The borrower will pay absolutely no interest for the life of the loan. Interest may be charged, but will be subsidized by the federal government.
eleven. Here’s the great part. If you get one of these loans, you don’t have to make any payments for the first year.
12. Advance fees are not allowed. Obtaining a loan of this type is 100% free (of course, you must pay the principal and interest after the one-year moratorium).
13. The SBA will decide whether or not collateral is required. In other words, if you have to put links on your property or residence. I suppose they will relax on this requirement.
14. You can get these loans until September 30, 2010.
15. Because this is emergency legislation, within 15 days of signing the bill, the SBA has to develop regulations.
Here is a summary of the current legislative language if you are having trouble falling asleep:
DRY. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- Subject to the availability of appropriations, the Small Business Administration Administrator shall carry out a program to grant loans in a deferred to viable manner (as determined by said term in accordance with the regulations of the Administrator of Small Business). Administration) Small business concerns that have a qualified small business loan and are experiencing immediate financial difficulties.
(b) ELIGIBLE BORROWER- A small business as defined in section 3 of the Small Business Act (15 USC 632).
(c) QUALIFYING SMALL BUSINESS LOAN – A loan made to a small business that meets the eligibility standards in section 7 (a) of the Small Business Act (15 USC 636 (a)) but will not include collateral loans (or loan guarantees). commitments assumed) by the Administrator before the date of promulgation of this Law.
(d) LOAN SIZE- Loans guaranteed under this section cannot exceed $ 35,000.
(e) PURPOSE- Loans guaranteed under this program will be used to make periodic payments of principal and interest, either in whole or in part, on an existing qualifying small business loan for a period of time not to exceed the 6 months.
(f) LOAN TERMS- Loans made under this section must:
(1) have a 100 percent guarantee; Y
(2) have fully subsidized interest during the repayment period.
(g) REIMBURSEMENT- The repayment of loans made under this section must:
(1) be amortized over a period of time that does not exceed 5 years; Y
(2) will not begin until 12 months after the final disbursement of funds is made.
(h) GUARANTEE: The Administrator of the Small Business Administration may accept any available guarantee, including subordinate bonds, to guarantee loans made under this section.
(i) FEES: The Small Business Administration Administrator is prohibited from charging processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, and other fees that may be charged to a loan applicant for loans. in this section.
(j) SUNSET: The Administrator of the Small Business Administration will not issue loan guarantees under this section after September 30, 2010.
(k) EMERGENCY RULES ENFORCEMENT AUTHORITY- The Administrator of the Small Business Administration shall issue the regulations under this section within 15 days after the date of promulgation of this section. The notification requirements of section 553 (b) of title 5 of the United States Code shall not apply to the promulgation of such regulations.
The real question is whether a private bank will make loans under this program. Unfortunately, few will do so because the statute very clearly states that fees of any kind cannot be charged, and how a bank can make money by lending under those circumstances. Sure, they can make money on the secondary market, but that has been exhausted, so they are basically being asked to make a loan with the kindness of their heart. On the other hand, it has a first 100% government guarantee so that banks know that they will receive interest and will not have the possibility of losing a penny. Maybe this will work after all.
But there is something else that would be of interest to a bank. In a way, this is a form of federal bailout that goes directly to the small community banks. They have delinquent loans on their books and could easily take advantage of the opportunity to rescue them with this program. Especially if they had not been the recipients of the first TARP funds. Contrary to public opinion, most of them received no money. But again, this might not apply to that community bank. Since they typically pack and sell their loans within three to six months, you probably wouldn’t even be in default at that point. It would be in the hands of the secondary market investor.
So is this good or bad for small businesses? Frankly, it’s nice to see that some of the ransom money is making its way to small businesses, but most of them would rather have a loan in the first place, rather than get help when they are in default. Unfortunately, this will have limited application.
Wouldn’t it be better if we just expanded our small business programs so more businesses could get loans? What if the SBA creates a secondary market for small business loans? I have a novel idea: For the moment, forget about defaults and focus on making business loans available to startups or existing businesses looking to expand.
How about having a program that can pay off high-interest credit card balances? There is hardly a business out there that hasn’t been financed with credit cards lately, simply because banks aren’t making loans. It’s not unusual for people to have more than $ 50,000 on their credit cards, just to stay afloat. Talk about saving high interest. You can imagine how much cash flow this would give a small business.
We should applaud Congress for doing everything possible in a short time to come up with this plan. Sure this is a welcome form of bailout for small businesses, but I think it misses the mark for most of the 27 million business owners who are simply looking for a loan that they can afford, rather than a handout.