“Small business owners have reason to be a bit less merry this holiday season.”
That is the conclusion of Jerry Chautin, a local volunteer business counselor with Manasota SCORE, Counselors to America’s Small Business.
You need to read his opinion editorial (below) that ran in the Herald-Tribune on December 20, 2010, to understand why the SBA’s termination of the Community Express loan program will probably make it harder for small businesses to get small loans.
By JERRY CHAUTIN
Published: Monday, December 20, 2010 at 1:00 a.m.
THE U.S. SMALL BUSINESS Administration announced on Dec. 15 that it was ending its Community Express pilot loan program on April 30.
The program has been widely used by small business owners in need of small amounts of working capital — up to $25,000 in most sites and $50,000 in Historically Underutilized Business Zones, called “HUBZones.”
Even though SBA initially created the program to target women and minority applicants, it was offered to both minority and majority owned businesses. Lenders relaxed their underwriting requirements, relied heavily on credit scoring and streamlined processing. Loans could be approved within one week.
Because of the small loan sizes and acceptance of lower credit scores, community express lenders made loans to applicants that were not able to get credit elsewhere.
SBA created the pilot 10 years ago and it was never made permanent. That enabled the agency to end it with a stroke of the pen. Even so, Superior Financial Group and Borrego Express Capital Lending, the only two national lenders that make these loans in Southwest Florida, took the risk of developing the infrastructure necessary to make the loans profitably.
SBA said it will replace Community Express with two new programs on March 15. One is called “Small Loan Advantage” and the other is “Community Advantage.” Both will go up to $250,000 and carry SBA’s basic 7(a) program guaranty structure — 85 percent for loans up to $150,000 and 75 percent for those greater than $150,000. But the loan application process will be more streamlined than basic 7(a).
But neither replacement will be made available through Borrego or SFG because both are non-bank, SBA-approved lenders. Instead, Small Loan Advantage will only be through the largest banks in the agency’s “Preferred Lender Program.” These banks have historically made larger loans that are 50 percent guaranteed up to $350,000 under the Express program, and 75 percent guaranteed up $5 million with basic 7(a).
Meanwhile, Community Advantage will be made available through “Community Development Financial Institutions, Certified Development Companies and non-profit microlending intermediaries,” SBA said. Presumably those organizations are sensitive to the needs of their local constituency and will provide technical assistance along with their financing.
But to make a meaningful number of Community Advantage loans, the lenders will have to sell their loans on the secondary market to replenish their funds. SBA spokesman David Hall said lenders “will have to apply for authority to sell loans on the secondary market.”
“We’ll be evaluating those requests based on a number of factors, but primarily how well-capitalized they are,” Hall said.
In my opinion, SBA is not offering enough of a carrot to get large banks in SBA’s Preferred Lender Program to change their culture of making larger loans.
On the other hand, helping the underserved is in the DNA of community-based institutions. But it will take a while for them to understand SBA’s 7(a) program and they will not make enough loans to have the enormously beneficial impact that Community Express lenders had on the small business community nationwide.
Small business owners have reason to be a bit less merry this holiday season.
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