More loans could be available for small businesses under proposed budget

Small business loans - Chris McGrath, Attorney At Law - McGrath, LLCIt’s often said that small businesses are the backbone of the American economy. From a numbers standpoint, this seems to be true. According to the U.S. Small Business Administration (S.B.A.), 99.7% of employers in the U.S. are small businesses. Small businesses also account for nearly half of private-sector employment.1

Despite their importance, however, small businesses have had a tougher time getting loans, especially in recent years. At the peak of the recession, small businesses needing loans felt the squeeze as they found their options often extremely limited.

In a recent article, the New York Times reports that the White House Administration is working to encourage banks to give loans to smaller businesses. According to the article, the White House budget for the S.B.A. for 2014, sent to Congress in mid-April, “would waive the agency’s fees for guaranteeing loans of less than $150,000.”

These fees include a one-time fee based on the size of loan and an annual fee of 0.55 percent on the part of the loan that is guaranteed by the S.B.A.

The drop in the lending of smaller loans has been attributed, in part, by S.B.A. officials to the failure of the loan programs S.B.A. Express and Community Express. Under S.B.A. Express, lenders were able to approve loans on the basis of the personal credit scores instead of business fundamentals. Through Community Express, lenders offered small loans to businesses in “struggling communities.” As a result of the closure of these programs, small businesses had to go through the S.B.A.’s 7(a) program. This program requires expensive underwriting for all loans on the part of the banks, so banks profit more from larger loans.

In addition, lenders have been hesitant to loan to smaller businesses, which are often newer and “riskier,” as they lack an established ability to repay the loan.

The S.B.A. itself has also taken measures to encourage the lending of small loans by streamlining the process for banks. Under the Small Loan Advantage program, according to the article, “banks can skip 100 pages of paperwork that normally accompany a loan application” for “loans that get an early green light.”

Whether these measures will be enough to effect real change in the ability of small businesses to get loans remains to be seen. Before going into effect, this proposal has to be approved by Congress.

 

1http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
2http://boss.blogs.nytimes.com/2013/04/18/the-s-b-a-wants-to-encourage-more-small-loans/?ref=smallbusiness

About Chris McGrath

I’m a Carmel, Indiana business attorney providing business counsel, commercial litigation and mediation services based on over 20 years of experience. My firm is founded on a principle of supporting others’ advancement and achievement, and my core values are service, passion, faith & loyalty.Chris McGrath’s Google+ Profile