Small Business Administration Loans Suddenly Scarce

For those living abroad, Small Business Administration sponsors a variety of loan programs that are administered through banks. Despite the name, SBA loans are typically used by the larger end of small businesses, one that might be on the cusp of getting a conventional bank loan or might qualify but find the pricing unattractive. The most important sources of funding for small businesses remain savings, friends and family, and credit cards.

The Journal reports that SBA loans, which often become more important to businesses in downturns, are hard to get, with a big reason the difficult conditions in the financial markets. A recent worsening of conditions in this market runs counter to the general perception that credit markets are improving. From the Wall Street Journal:

When entrepreneurs can’t get conventional loans, they traditionally turn to loans backed by the Small Business Administration. But in recent months — as many banks turned away businesses and slashed credit lines — SBA lending also has dried up substantially. The retrenchment has become especially pronounced in the past couple of weeks…

“SBA volume is significantly down, and one might argue that [it’s happening] at a time when small business needs access to capital more than ever,” says Chris Reilly, president of CIT Small Business Lending Corp. of Livingston, N.J., which ranks among the top SBA lenders nationwide.

The SBA reported last week that loan volumes made under its flagship 7(a) loan program fell 30% in the fiscal year ended Sept. 30. And in October, overall SBA loan volumes were 50% lower than in October 2007, due mainly to sharp drops in the SBA Express loan program that makes smaller loans, says Eric Zarnikow, head of the SBA’s Office of Capital Access.

SBA lenders as well as officials including Mr. Zarnikow blame the decline on a number of converging factors, including lower demand for loans overall, tightened lending standards and declining creditworthiness among applicants. Some lenders say they’re pulling back to avoid increased losses in their SBA portfolio. Others are warier of making loans because of declining collateral value — particularly the value of homes in regions like California, where prices have fallen sharply.

In recent weeks, however, lenders are reporting yet another problem with their SBA lending programs. Banks and lenders can’t sell SBA-backed loans to other institutions on the secondary market, which many lenders rely on to free up capital to issue new loans.

The reason: Returns on SBA-backed loans are pegged to the prime lending rate, which has fallen in line with Federal Reserve cuts in key interest-rate targets. Yet for most potential investors, the cost of obtaining capital to buy those loans — determined by the London interbank offered rate, or Libor — has soared as the Wall Street financial crisis hit credit markets. That has made the SBA loans a much less attractive investment for buyers.

The two rates recently began reverting to normal spreads. But it’s unclear how long it will take for SBA lending to recover….

Sens. John Kerry (D., Mass.) and Charles Schumer (D., N.Y.) sent a letter Monday to Sandy Baruah, the SBA’s acting administrator, urging the agency to make a raft of changes to its lending programs to give temporary relief to small businesses seeking financing right now. Among the changes they recommend: granting bridge loans to small businesses through the SBA’s disaster-loan program and readjusting the rate cap on 7(a) loans to make them more financially appealing to lenders.

They argue that the bailout package passed by Congress will take too long to trickle down to small companies. “Small businesses can’t wait any longer for a lifeboat to arrive,” Sen. Kerry says in a statement. “They need help now and the SBA has the power.”