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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2010

Small Business Gets a Boost

With the help of recently enacted legislation, small-business lending may lead a national charge to recovery

The importance of small businesses to the economic well-being of the U.S. is under the microscope. After the $787 billion stimulus package failed to stem job losses, small businesses have become the next big hope. Measures like the Small Business JobsAct,signedby President Barack Obama this past September, are touted as the next big drivers for the U.S. economy.

The question for many mortgage brokers is whether small-business lending is the next big opportunity. Brokers who are familiar with the Small Business Jobs Act and other measures affecting small businesses may find ways to help new and current clientssecurefunding
The act has several provisions that affect U.S. Small Business Administration (SBA) loans, including:

  • Loan-guarantee fees are waived until Dec. 31;
  • Loss-guarantee levels are increased to 90 percent; and
  • SBA 7(a) loan limits are increased from $2 million to $5 million.

These provisions will help increase access to funding for small-business owners as well as lower the cost of funding. The act also may kick-start the secondary market for SBA loans, as higher loan-loss guarantee levels attract more investors to buy these loans, thereby leading more banks to underwrite these loans.

Certain provisions in the act make more sense when examining how the credit market has behaved recently.

In 2007, banks started chasing the next big thing after home mortgages and rushed to lend money to small businesses. Major banks were lending actively, and many banks used the SBA Community Express program aggressively.

By 2008, the pendulum started to swing the other way — so much so that by early 2009, access to credit for small businesses dried up almost totally. The stimulus package enacted in early 2009 had little focus on credit access for small businesses. Meanwhile,stopgap arrangements — such as the temporary extension of SBA guarantees and the elimination of guarantee fees — were implemented. Those measures helped the small-business credit landscape but didn’t lead to a sustained recovery.

With the Small Business Jobs Act, Congress created a $30 billion lending fund. The fund, coupled with an increase in lending limits, will help spur lending and provide more money to small businesses.

With this type of fund, there could be a temptation for banks to lend aggressively. Banks likely won’t return to the reckless lending of a few years ago, however. They have tightened their underwriting criteria — requiring lower loan-to-value ratios and higher personal credit scores — and have increased the emphasis on checking the business credit of potential borrowers. Brokers should help small-business clients understand these tightened underwriting criteria and the opportunities created by the Small Business Jobs Act. Many analytics tools can help borrowers monitor their creditworthiness and  credit risks. By understanding the changing credit markets for small businesses, brokers can become a trusted resource for small-business clients.


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