Obama Seeks More Ammo for SBA

President Obama today unveiled yet another initiative aimed at helping small businesses with their credit needs. He proposed legislation that would allow small businesses who own and occupy their own buildings to refinance their commercial real estate loans through the Small Business Administration’s 504 loan program. Many of these mortgages are coming due, but banks are hesitant to refinance them, given the weak condition of the commercial real estate market.

“Right now, even companies with great credit histories are facing challenges refinancing at what are historically low rates,” Obama said. “Property values have fallen, and lending has dropped. As a result, many businesses that would otherwise survive this downturn are at a risk of defaulting, which in turn will lead to even lower property values and less lending, not to mention lost jobs.”

The solution, the president said, is to allow small businesses to use government-guaranteed 504 loans to refinance their mortgages. These loans are offered through nonprofit certified development companies, working with private lenders. They normally can be used only for new development or construction.

The economic-stimulus bill, however, allowed businesses that are expanding to use 504 loans to refinance existing debt. The new proposal, which requires action by Congress, would allow any small business—even those not expanding—to use the 504 program to refinance commercial mortgages maturing in the next year. The business must be current on all loan payments, however. The administration estimates this would allow small businesses to refinance up to $18.7 billion in commercial real estate that otherwise could face foreclosure.

The president also proposed temporarily increasing the maximum size of SBA Express loans from $350,000 to $1 million. This program enables lenders to use their own paperwork for the loans, unlike the SBA’s traditional 7(a) loans. The SBA, however, only guarantees 50 percent of the amount of these loans, compared with the 90 percent guarantee temporarily in place for regular 7(a) loans. Increasing the size of SBA Express loans will enable more small businesses to meet their needs for working capital, said SBA Administrator Karen Mills.

“In the tight credit market of the last two years, lines of credit have been cut for small firms,” Mills said. “Raising the limit on SBA Express loans to $1 million will mean more small-business owners will have quicker access to this sort of capital to help restock inventories and support larger revenue sales, and literally take that next step to grow their business and crate new jobs.”

Even though the government guarantee on these loans is only 50 percent, Mills expects SBA lenders would make larger SBA Express loans if allowed to by Congress. “I think they are going to take us up on this,” Mills said.

Financial regulators also did their part today to encourage banks to lend to small businesses. Banks have contended that pressure from regulators is one reason why they’ve cut back on lending.

Today, federal regulatory agencies and state bank supervisors issued a joint statement urging banks not to be “overly cautious with respect to small-business lending.” “Financial institutions that engage in prudent small- business lending after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for loans made on that basis,” read the statement. Banks shouldn’t make lending decisions solely based on national market trends or a borrower’s industry, the statement said.

If banks think regulators are serious about this statement, it could have an immediate positive impact on the availability of credit to small businesses. Obama’s proposals, on the other hand, may take a while to bear fruit since they require legislative changes. These days, action by Congress is even scarcer than credit.