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Release Date: 12.08.2010 | Location: All Metro Atlanta | Organization: Small Business Finance Institute

Guaranteed Lending Will Be the New Norm


Article by Charles Green

Remember the '90s? The economy was in recession after the Savings and Loans crisis wiped out about 1,500 banks and the Resolution Trust Corporation dumped thousands of properties, depressing the commercial real estate market for years.

To lower the risk of lending to the many small businesses that depended on real estate, many bankers turned to the U.S. Small Business Administration’s loan guaranty programs in droves. After being the literal lender of last resort for so many years, the program was modified significantly during the Reagan years to lower its costs and reign in program losses.

But the uncertainty of commercial real estate brought the SBA program back in vogue with a fury, more than doubling the annual loan volume by 1995. As the economy regained traction heading toward the new millennium, banking also started to recover, as many de novo banks sprung up in crowded markets like Southern California, Phoenix, Las Vegas, Atlanta, Tampa, Dallas, and Houston.

Even while seeing net growth of SBA loans, some of these new banks were so competitive as to begin to make 15 and 20 year real estate term loans without an SBA guaranty, giving the best companies more financing choices. Everyone focused on growth. In mid '90s, the Glass Stegall Act ended allowing major banks to venture into investment banking and insurance, and most abandoned the small business market in favor of big ticket lending to publicly-owned companies.

Those days changed in 2008 for large and small institutions as the banking world stumbled into uncharted territory, combining a severe economic recession with a real estate depression. Aggressive regulators forced tougher loan management which resulted in capital write-downs of epic proportions. More than 300 banks have failed at the time of this writing.

You can already see a migration back to SBA guaranteed lending by small and large banks that I predict will continue to swell. Lenders had a brief taste of the old days of a 90% guaranty (thanks to the stimulus package and small business jobs bill) and borrowers responded very positively to the waived guaranty fees. Watch for more banks to begin making SBA loans like never before. Why? It’s a combination of three factors for participating banks:

1) SBA loans lower credit risks during the tightest underwriting period in a generation

2) SBA loans permit banks to recycle their capital more efficiently with a robust secondary market to sell loans

3) SBA loan sales create desperately needed fee income for banks

With recently enacted higher loan limits ($5 million) and broader eligibility standards, more businesses are eligible for the program than ever before. And, new liberalized refinancing options mean banks can move many real estate loans off their books with an SBA guaranty and recapture loan loss reserve dollars back into earning service.

SBA has always been good business, sometimes just inconvenient. With the continued uncertainty of our economic recovery that has adversely affected most U.S. banks, we need to look for SBA as a key tool to re-start the lending and growing process.

Charles H. Green

Small Business Financing Advisor and author of The SBA Loan Book, 3rd Edition (Adams Media)

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Contact Info

Contact Name: Charles Green

Company: Small Business Finance Institute

Phone: 404-406-3181