Small Business Loan Update - Is Anyone Out There Making Loans? Will the Federal Bailout Help Us?

As Americans, We‘re glued to the newest CNN, Fox, or local news reporting the developments in Washington on bail-out programs. If you‘re a little business owner, you‘re waiting for the bailout--some excellent news about freeing up capital markets so that you could apply for any modest small business loan. Amidst this dismal news, you could be tempted to question :

Is it possible hear me? Can there be anyone available still making business loans? There will be such lenders, but you are getting fewer from the day.

To comprehend the matter, you‘ve to obtain a grasp about how SBA lenders operate. Inside the days in our parents and grandparents, banks would have a loan based upon their liquidity stemming from bank deposits. They kept the loans in house and picked up the interest. You Didn‘t need to stay awake in accounting class to work out one is allowed to have a limited quantity of loans--the level of interest you‘re collecting is small in relationship to the entire principal loaned. You may have a $100, 000 loan, but only get $10, 000 back throughout the year on interest. At a particular point you merely expired of cash to loan.

But that each one changed during the past several decades when banks could immediately sell their loans upon the secondary market and obtain cash. So a similar $100, 000 loan could immediately be sold for, hypothetically, $110, 000 (the increased value or premium comes from the undeniable fact that the purchaser would receive interest during the term of loan well in more than the principal loaned ) and also the bank would get fresh monies back to their coffers. So that they re-tooled, fired in the machines, and started cranking out increasingly more loans. The greater they sold upon the secondary market, the greater profit and further loans could possibly be made.

SBA loans were particularly attractive. Investors drooled over those babies. The Federal government guarantees them from default at the speed of between 50% and 90%, depending upon this program utilized. Therefore the banks would pool together and package their loans, selling upon the secondary market. Whoopee ! Consequently, investors would buy them almost as a security. It was eventually a win--win situation for everybody. For that reason, the secondary market was very robust for such loans.

Though there would be a downside. SBA loans are based upon a floor percentage (4. 5% for Community Express loans with ten year terms ) as well as the Wall Street Journal prime rate. So, for instance, the current prime rate is 3. 25% so when added to the ground percentage yields a total percentage of 7. 5%. However the prime rate keeps going down. Therefore, interest becomes lower and lower and hence less attractive to investors (less spread).

And worse yet, the amount of SBA loans is decreasing. For instance, in August and September of 2008, SBA loans were down approximately 50% coming from the year before.

Consequently, the secondary market has dried up. Consistent with James Hughes, President and CEO of Unity Bancorp, there is virtually no market left for SBA loans. See Pullback in Secondary Market Hits SBA Lenders (October 30, 2008 ). Which means that the wider banks are using exclusively depositor's monies and corporate debt to process their loans.

So exactly just what small business to carry out? Here are a few suggestions :

o Choose a SBA licensed lender which is not a big bank. Remember, banks are the standard institutions which have checking and savings accounts, credit cards, CD's and also the like. During this market, few if any the strategies are making small business loans. However, non-depository SBA lenders are more likely to loan.

o Find a lender which has had many many years of experience with small business loans. They‘re more likely to become small business friendly.

o Choose a lender that does nothing but SBA small business loans. Since this really is their best way of making money, they do not have choice but to carry on loaning, even inside a bad market.

The excellent news is Congress will hopefully renew the discussion of invigorating the secondary market to encourage small business loans. I am not saying this as a large eyed idealist, but coming from the simple reason that capital channels can‘t be plugged up indefinitely in your country. Even our politicians can't mess up that straightforward fact of capitalism. When this happens, the money will again flow. I firmly believe this‘ll happen, It‘s only an issue of when. In subsequent article I will be able to discuss what financial institutions might still be making business loans.