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7:33 PM   April 18, 2015
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Downturn Financing Updated

The U.S. Treasury and SBA continue efforts to help ease the credit crunch affecting small businesses.
By Mark E. Battersby

Just three months after the recession reportedly ended in the summer of 2009, at least according to many experts, U.S. Treasury Secretary Timothy F. Geithner announced, “This credit crunch is not over.”

The Treasury Secretary’s statement, “It may feel dramatically better for large companies but it is not over for small businesses across the country,” was prophetic. Several days later, CIT Group Inc., the company that provides badly needed credit to thousands of small and mid-sized businesses, many in the retail sector, filed for Chapter 11 bankruptcy.

The lack of available capital affects every pet specialty retailer, wholesaler and distributor and appears to be continuing as a major concern for the foreseeable future. The Federal Deposit Insurance Corporation (FDIC), for example, recently reported that lending at U.S. banks fell 3 percent in the third quarter of 2009, representing the fifth consecutive quarter in which banks have reduced lending.

Surprisingly (and frustratingly)the FDIC report revealed that the largest banks--banks that received billions in taxpayer dollars via the Troubled Asset Relief Program (TARP)--were responsible for a disproportionate amount, nearly 75 percent, of the lending decline. What’s more, this occurred during a period when banks posted aggregate profits of $2.8 billion.

Despite all of the available capital apparently going to big business and government, there are a few bright spots among the clouds. As part of the American Recovery and Reinvestment Act of 2009, for instance, the maximum guarantee on U.S. Small Business Administration (SBA) 7(a) loans was increased to 90 percent and borrower fees were temporarily eliminated for the 7(a) program, as well as for both borrower and lender fees for 504 loans.

The SBA’s primary and most flexible 7(a) Loan Program is designed for both start-up and existing small businesses, and involves government-backed guarantees for amounts loaned for general business purposes. Last spring, the Treasury and the SBA announced a joint initiative to make direct purchases of securities backed by 7(a) loans on the secondary market in the hope of freeing capital and encouraging more small-business financing.

The SBA’s CDC/504 Loan Program provides long-term, fixed-rate financing to acquire fixed assets (such as real estate and equipment) for expansion or modernization. It is ideal for small businesses requiring “brick and mortar” financing. Rather than commercial lending institutions, 504 loans are delivered via CDCs (Certified Development Companies)--private, non-profit corporations set up to contribute to the economic development of their communities.

More than 20 percent of roughly 350 bankers surveyed said they would raise the number of new loans and increase loan amounts to existing small business borrowers over the next two years.

The SBA itself hasn’t been idle. The SBA’s weekly loan volume is up more than 75 percent since the beginning of the year. It has expanded 7(a) loan eligibility to more than 70,000 businesses through alternative size standards and recently proposed increasing the size definitions for three broad commercial sectors--two-thirds in the retail sector--even further. Since February 2009, more than 900 lenders, lenders that had not made SBA loans since 2007, participated in SBA lending programs.

The SBA also has a unique program to provide small (up to $30,000), short-term “microloans” for working capital for the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Ideal for those needing small-scale financing and technical assistance, the SBA microloans are delivered through specially designated intermediary lenders (non-profit organizations with experience in lending and technical assistance).

The America’s Recovery Capital, or ARC, loan program provides viable small businesses suffering immediate financial hardship some temporary financial relief so they can keep their doors open and get their cash flow back on track. An ARC loan is a deferred-payment loan of up to $35,000, 100-percent guaranteed by the SBA. In addition to no interest charges to the borrower, the SBA will pay the monthly interest at the rate of Prime plus 2 percent to the lender on behalf of the borrower. After a 12-month deferral period, the borrower pays back only the ARC loan principal over a period of five years. To date, more than 4,000 ARC loans totaling $130 million were to viable small businesses.

Microloans from the SBA and a variety of other sources, ranging from banks and credit unions to community development organizations, are increasingly popular. The nonprofit website, the world’s first person-to-person micro-lending website, which has traditionally facilitated microloans only in developing countries, began testing a new micro-lending program in the U.S. early in 2009.

According to a global survey of banks recently conducted by The Banker magazine, working with the International Federation of Accountants, more than 20 percent of roughly 350 bankers surveyed said they would raise the number of new loans and increase loan amounts to existing small business borrowers over the next two years. Only 2 percent of those surveyed said they would restrict loans to small businesses.

The U.S. Treasury Department reports the secondary markets have already recovered. In January 2009, the total volume for loans settled from lenders to broker-dealers on the secondary market for SBA loans had fallen to just $85.9 million. From May to October 2009, however, the average monthly volume settled to broker-dealers was $344 million--above pre-crises levels.

The Treasury Department’s recent announcement of an initiative to provide lower-cost capital to community banks that submit plans to increase small business lending, along with a new program to support Community Development Financial Institutions lending to small businesses, illustrates the Treasury’s and the SBA’s ongoing efforts to help ease the credit crunch affecting so many small pet specialty businesses. <HOME> 

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