Small Business Loan News – What Happens When the Funds Run Out in the Stimulus Bill?

If you are a small business owner, you know there was welcome relief in the American Recovery and Reinvestment Act of 2009, popularly known as the Stimulus Act. So what was so great about the Act? Among other things, section 501 reduced the fees paid by borrowers so they did not have to pay the dreaded “SBA loan guarantee fee”. This was traditionally 2% of 75% of the loan amount on the large 7(a) loans. Also, section 502 increased the guarantee percentage which pays banks their losses upon default, from 75 to 90%. Cause for celebration? Absolutely. But we must temper our excitement with the fact these benefits may no longer be in effect if Congress does not appropriate more money. In fact, some pundits think it may run out in December based on the volume of SBA loans.

To understand this, you have to get a grasp on why more money is needed. Prior to the Act, banks were given more incentive to make loans because the SBA would step in and pay their losses by a certain percentage. When the guarantee rate went from 75% to 90%, coupled with a higher default rate because of the economy, the Feds had to shell out more money to the banks. And then there was the waiver of SBA guarantee fees which are subsidized by taxpayers-you and I. Without the money, those incentives go way.

So, things were really percolating along as a result of these incentives. In the beginning of 2009, the SBA approved approximately 165 million loans. But by July and August, the figure had risen to 320 million and 400 million respectively. More loans simply meant more risk-increased expenditures by the government.

And so what is Congress doing to find the extra funds? It is probably unlikely to secure additional appropriation in the new Stimulus Act amendments since they have already passed committee and did not include such measures. Instead, Congress is looking into any unused money under our friend (depending on what political aisle you’re sitting on) the Troubled Asset Relief Program (TARP). This originally allocated funds to prop up the secondary market. Amendments to that bill could provide some of the appropriation necessary.

Translation: as small business owners we don’t care what you call it or who’s doing it, just as long as these incentives continue. The fact that there are actually banks making small business loans does wonders to provide needed capital and at least keep our hopes alive in this anguishing financial market.

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