The Mindset for Wealth

SBA Loans  - The Buck Stops Here. I recently approached a few banks about a business line of credit and quickly realized the real meaning of the credit markets being frozen. There is no question that banks are wary - if not fearful - of lending money right now. Yet, I know that a business line of credit is not an SBA loan, which really is business friendly, right? I beg to differ.

Let's first look at the business line of credit, which one would assume would have more rigorous credit standards. That's fine.  So what does it take to get a business line of credit? There seems to be no exception to banks requiring 100% collateral to be held against the value of the loan. In other words, if a business wants a $250K line of credit, it needs to set aside $250K in liquid assets. The obvious question, is ‘why get the loan if you have the money to set aside in the first place'? What's more, there seem to be no mitigating circumstances for established businesses (not a start up) with impeccable credit, proven revenues, solid pipeline of business, and even written commitments from business partners. I have spoken to numerous business owners who have encountered the same hurdles.

It seemed that the saving grace for small businesses was the announcement by the SBA (Small Business Administration) to guarantee up 90% of the loan amount on SBA approved loans (offered through SBA approved lenders/banks), leaving the bank with a mere 10% exposure. It seems that this is exactly what is needed to get businesses borrowing again, expanding, and hiring. In fact, according to some estimates, small businesses have created over 93% of all net new jobs in the past 15 years. It seemed that the SBA had given businesses and the economy ‘just what the doctor ordered'.

I had to dig a little deeper into this ‘opportunity' to vet the idea for myself. While it is true that the SBA tells small businesses it will guarantee up to 90% of the loan amount, it is telling banks something very different. In essence, the banks are assured by the SBA that their risk exposure is limited - unless the loans go into default. At that point, the SBA will determine if the banks adequately did their due diligence when approving the loan. If the SBA determines that the banks did not, then the bank can be on the hook for the entire loan amount. Yep, that 90% guarantee is anything but a guarantee.

The banks I have spoken to made it very clear - the risk that they will be ‘guilty until proven innocent' is too risky. And if they do have to ‘defend' their credit decision, they don't want to get caught up in the quagmire of government bureaucracy. What does this mean for small businesses? Remember the underwriting guidelines for the business line of credit mentioned above? Well, those pretty much apply to the SBA loans with a 90% guarantee, too. What seemed to be the right prescription for the economy has too many strings attached to prove effective in practice.

It is a shame that the government pumped tens of billions of dollars into large businesses that were ‘too big to fail' (think automakers) only to have them, well, fail. The fear was that these behemoths would force millions into the ranks of the unemployed. The sad reality is we spent a lot of money to prop up ailing businesses that ultimately forced people into unemployment. Yet, there seems to be little real, substantive support for the engine that really generates jobs in this country - small businesses.