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SBA May Not Be Able to help Small Business Lending and the Economy

The economy lost 2.6 million jobs in 2008 – the highest level in more than six decades. And there are projections of up to 2 million more in 2009. GM has been told by the Treasury Department to prepare for a bankruptcy filing, possibly as early as June. No one knows how many jobs across several sectors will be lost. On Monday April 13, you could buy a share of GM stock for about the price of a tall Starbuck’s regular coffee – no latte, no nothing. Think about one person and how that person’s normal spending ripples through the economy. Think about just the little things you spend money on in good (normal – not great) times. Maybe now you fix lunch at home to take to work; maybe you don’t buy that cup of coffee (or at least the Danish to go with it); maybe you even wear that shirt or blouse one extra day to save money at the cleaners, and on and on. You might be surprised when you start looking at the list. And each dollar that is not spent somewhere, such as a local small business, makes it a little harder for that business to make ends meet, resulting in possibly having to let someone go, cut back on its own purchases, etc.

This is exactly what is happening now in the economy, and each new job layoff is going to ripple through the economy affecting more people until we come to the bottom. The government is making every conceivable effort to turn the economy around, and it will ultimately succeed. The stimulus package is beginning to filter into the economy and have a positive effect in many sectors. But billions of dollars cannot get out but so fast, so the effects of the stimulus will not begin to be felt at least until the end of 2009. Meanwhile, many small businesses will have more and more trouble earning a profit and ultimately, surviving. One particularly interesting thing happening now is that consumer saving is beginning to climb – so far from near zero to approaching three or four percent. Long-term, this is excellent. Short term, it poses a real problem, because since the economy is approximately 70% driven by consumer spending, every dollar saved is obviously money that is not going to be spent no matter what steps the government takes. So it is the classic Catch-22 – doing the right thing leads to the wrong result.

Once the economy does begin to turn around, it is not going to improve quickly. There is so much excess capacity now in the system as a result of downsizing, plant closings, empty retail locations (think Circuit City), etc., that some of that slack will have to be taken up first without companies having to add many people, plants, equipment, etc. So I don’t believe that we will begin to see any significant improvement until sometime in 2011.

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.

What Can the Small Business Owner Do?

If you have not been able to get a loan, but your business is sound but not quite strong enough right now to meet today’s tightened credit requirements, then it may be time to develop a strategic plan to put yourself in a position to obtain financing as soon as possible Among the many things you need to do if you are not already, is to become an expert in financial analysis. The first thing a lender is going to look at (aside from your credit report) when you apply for a loan are your company’s financial statements and business tax returns. The ability to understand and communicate financial information is critical to every small business owner under normal circumstances, but it is even more critical today. It tells you and a lender how your business is truly performing and where its strengths and weaknesses are. By understanding the relationship between your balance sheet, income statement and cash flow statement, it allows you to take any necessary action to head off a problem before it can create a bigger problem, and can lead to the development of strategies to improve the company’s overall profitability and cash flow. It also shows a lender that you run your business in a professional manner.

Being able to explain to a lender what your problems are and have been, and how you dealt with them to improve your financial performance going forward, may make a lender consider you a better credit risk than others who do not understand it. So when credit does begin to open up, you will be near the front of the line.

Doug Carleton has worked in SBA lending since 1994, is a nationally published expert in financing for the bed and breakfast industry, and has spoken on bed and breakfast financing as well as SBA and small business financing as well as. He consults regularly with small business owners on matters related to financing.