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Small Business Loan Update - Stimulus Bill Helps Bailout Businesses If They Cannot Pay Loans
As we continue steadily to sift dutifully through the over 1,000 pages of the stimulus bill (American Recovery and Reinvestment Act of 2009), there's one provision that is not getting much attention, but could be very helpful to small businesses. If you are a small business and also have received an SBA loan from your own local banker, but are having trouble making payments, you may get a "stabilization loan". That's right; finally some bailout money switches into the hands of the small business owner, rather than heading down the proverbial deep hole of the stock market or large banks. But don't get too excited. It is limited by very specific instances and isn't available for vast majority of business owners.

There are some news articles that boldly claim the SBA will now provide relief should you have a preexisting business loan and are having difficulty making the payments. This is not a true statement and needs to be clarified. As observed in more detail in this article, this is wrong since it applies to troubled loans manufactured in the future, not existing ones.

Here's how it works. Assume you were among the lucky few that look for a bank to make a SBA loan. You proceed on your merry way but run into tough economic times and find it hard to settle. Remember these are not conventional loans but loans from an SBA licensed lender that are guaranteed for default by the U.S. government through the SBA (dependant on the loan, between 50% and 90%). Beneath the new stimulus bill, the SBA might arrived at your rescue. You will be able to get a new loan which will pay-off the existing balance on extremely favorable terms, buying more time to revitalize your business and get back the saddle. Sound too good to be true? Well, you be the judge. Here are some of the features:

1. Does not apply to SBA loans taken out prior to the stimulus bill. Concerning non-SBA loans, they are often before or following the bill's enactment.

2. Does it apply to SBA guaranteed loans or non-SBA conventional loans aswell? We don't know for sure. This statute simply says it pertains to a "small company concern that meets the eligibility standards and section 7(a) of the Small Business Act" (Section 506 (c) of the new Act). Which has pages and pages of requirements which could apply to both forms of loans. Based on a few of the preliminary reports from the SBA, it appears it pertains to both SBA and non-SBA loans.

3. These monies are at the mercy of availability in the funding of Congress. Some think the way we are choosing our Federal bailout, we are going be out of money prior to the economy we are trying to save.

4. You do not get these monies if you don't are a viable business. Boy, it is possible to drive a truck through that phrase. Our friends at the SBA will determine if you are "viable" (imagine how inferior you can be when you have to tell your friends your organization was determined by the Federal government to be "non-viable" and on life support).

5. You have to be suffering "immediate monetaray hardship". So much for holding out making payments because you'd like to use the money for other expansion needs. Just how many months you have to be delinquent, or how close your foot would be to the banana peel of complete business failure, is anyone's guess.

6. It is not certain, and commentators disagree, as to whether the Federal government through the SBA will make the loan from taxpayers' dollars or by private SBA licensed banks. In my opinion it is the latter. Business Investment Loans posesses 100% SBA guarantee and I would make no sense if the government itself was making the loan.

7. The loan cannot exceed $35,000. Presumably the brand new loan will be "taking out" or refinancing the entire balance on the old one. So if you had a $100,000 loan you have been paying on time for several years however now have a balance of $35,000 and so are in big trouble, boy do we have a program for you. Or it's likely you have a smaller $15,000 loan and after a short time need help. Regulations does not say you need to wait any particular time frame so I guess you could be in default after the first couple of months.

8. You need to use it to make up no more than six months of monthly delinquencies.

9. The loan will be for a maximum term of five years.

10. The borrower will pay absolutely no interest for the duration of the loan. Interest could be charged, but it will be subsidized by the Federal government.

11. Here's the fantastic part. If you consider using a loans, you don't need to make any payments for the first year.

12. There are zero upfront fees allowed. Getting this type of loan is 100% free (of course you have to pay principal and interest after the one year moratorium).

13. The SBA will decide whether or not collateral is required. In other words, when you have to put liens on your property or residence. My guess is they'll lax concerning this requirement.

14. You can obtain these loans until September 30, 2010.

15. Because this is emergency legislation, within 15 days after signing the bill, the SBA must come up with regulations.

This is a summary of the actual legislative language for anyone who is having trouble getting to sleep:

SEC. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- At the mercy of the availability of appropriations, the Administrator of the Small Business Administration shall perform a program to supply loans on a deferred basis to viable (therefore term is set pursuant to regulation by the Administrator of the Small Business Administration) small company concerns which have a qualifying small company loan and so are experiencing immediate financial hardship.

(b) ELIGIBLE BORROWER- Your small business concern as defined under section 3 of the Small Business Act (15 U.S.C. 632).

(c) QUALIFYING SMALL BUSINESS LOAN- A loan made to your small business concern that meets the eligibility standards in section 7(a) of the Small Business Act (15 U.S.C. 636(a)) but shall not include loans guarantees (or loan guarantee commitments made) by the Administrator prior to the date of enactment of the Act.

(d) LOAN SIZE- Loans guaranteed under this section may not exceed $35,000.


(e) PURPOSE- Loans guaranteed under the program shall be used to make periodic payment of principal and interest, either completely or in part, on an existing qualifying small company loan for a period not to exceed six months.

(f) LOAN TERMS- Loans made under this section shall:

(1) carry a completely guaranty; and

(2) have interest fully subsidized for the period of repayment.

(g) REPAYMENT- Repayment for loans made under this section shall--

(1) be amortized over a period never to exceed 5 years; and

(2) not begin until 12 months after the final disbursement of funds is made.

(h) COLLATERAL- The Administrator of the Small Business Administration may accept any available collateral, including subordinated liens, to secure loans made under this section.

(i) FEES- The Administrator of the Small Business Administration is prohibited from charging any processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, along with other fees that could be charged to financing applicant for loans under this section.

(j) SUNSET- The Administrator of the tiny Business Administration shall not issue loan guarantees under this section after September 30, 2010.

(k) EMERGENCY RULEMAKING AUTHORITY- The Administrator of the tiny Business Administration shall issue regulations under this section within 15 days following the date of enactment of this section. The notice requirements of section 553(b) of title 5, United States Code shall not connect with the promulgation of such regulations.

The true question is whether an exclusive bank will loan under the program. Unfortunately, few can do so as the statute very clearly states that no fees whatsoever can be charged, and how do a bank make hardly any money if they loan under those circumstances. Sure, they might make money in the secondary market, but that's dried up, so they basically are asked to create a loan from the goodness of their heart. On a other hand, it posesses first ever 100% government guarantee so the bank's know they will be receiving interest and will have no chance for losing an individual dime. Maybe this can work after all.

But there is something else that would be of interest to a bank. In ways, this is a type of Federal bailout going right to small community banks. They will have on their books loans which are in default and they could easily jump at the chance of to be able to bail them out with this program. Especially if that they had not been the recipients of the initial TARP monies. Unlike public sentiment, a lot of them did not receive hardly any money. But again, this might not connect with that community bank. Given that they typically package and sell their loans within three to six months, it probably wouldn't even maintain default at that time. It would be in the hands of the secondary market investor.

So is this good or harmful to smaller businesses? Frankly, it's good to see that some bailout money is working its way toward small businesses, but most of them would rather have a loan to begin with, compared help when in default. Unfortunately, this will have a limited application.

Wouldn't it be better if we simply expanded our small business programs so more businesses could get loans? Think about the SBA developing a secondary market for small company loans? I have a novel idea: for as soon as just forget about defaults, and concentrate on making business loans open to start-ups or existing businesses attempting to expand.

My Website: https://lendingcapital.net/blogs/