SBA May Not Be Able to help Small Business Lending and the Economy
To banks, small business lending is the highest-risk lending that they normally do, simply because small businesses historically have had a higher failure rate. So when the economy begins to worsen, small business loans are the first to go, which we have already seen. The flip side of that is that when the economy does finally begin to improve, small business loans will be the last to begin to loosen up. So, we have an economy that is going to probably worsen all the way through 2009, and then bounce along the bottom for a while in 2010 before any significant improvement, which will delay any significant increase in small business lending.

What about the SBA?
In early spring of 2009, SBA dramatically improved the attractiveness of SBA loans by raising the guarantee from 75% to 90% on many major loan products. It also eliminated certain fees. But since SBA loans are commercial loans made by banks and non-bank SBA lenders, it doesn’t make any difference that SBA has improved their terms because banks are not lending to the small business market anyway. The way SBA lending works is that if a bank approves a loan contingent on SBA approval, then the SBA guarantee is requested. So if banks won’t make a small business loan to begin with, the SBA guarantee doesn’t do anything because SBA never sees it because the bank never asked for the guarantee. A lot of banks do SBA loans, but the vast majority of banks that are licensed to do them made one or two, if any, last year. This is especially true of the community banks which generally do have funds available and are often in areas where they know the specific property or the business owner is already a customer. But they won’t do SBA loans because they are too paperwork-intensive, and most banks just are not set up to handle them.