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Small Business Jobs Act Stimulates SBA Borrowing

December 10, 2010

All indications are that the Small Business Jobs and Credit Act of 2010, which took effect with President Obama's signature Sept. 27, is indeed stimulating small business borrowing as intended.

Borrowing under the Small Business Administration's two primary real estate-secured lending programs virtually doubled over the first eight weeks after passage. And it's pretty clear a lot of small business bankers are gearing up for better borrower demand ahead - even though some key stimulus provisions of the Act are set to expire at year-end, and others are yet to be implemented.

The Act permanently and substantially raises the maximum sizes of SBA loans under its 7(a) floating-rate and 504 fixed-rate guaranteed lending programs - and of companies eligible to receive them. It temporarily reinstates stimulus-related enhancements including waivers of loan/guarantee fees and a higher 7(a) guarantee rate (90 percent of principal SBA guarantee vs. the normal 75).

Along with meaningful small business tax cuts, the Act also extends the 504 program (typically limited to real estate purchases and development) to refinances of maturing commercial mortgages secured by owner-occupied business properties. And it provides for a $30 billion fund that qualifying small lenders can tap, with individual institutions' borrowing costs reduced in correlation to increased business lending levels.

The specific rules for the 504 refi provision and the community bank fund are still being hammered out in Washington - as lenders and borrowers eagerly await implementation.

Meanwhile according to data SBA provided SmallBalance.com, 7(a) and 504 lending has already jumped sharply with the Act's passage.

With stimulus-related enhancement funding exhausted and then replenished a handful of times between October 2009 and May 2010, 7(a) and 504 lending averaged $1.65 billion monthly. Then with those enhancements exhausted during the entire period from June through nearly the end of September, the monthly average fell to $966 million.

Since then, the monthly average has more than doubled, with $4.1 billion in loans funded over just the last eight weeks. Hence it's no surprise all manner of private SBA lenders are adding loan officers to handle additional business.

"We've seen additional borrowing activity the last couple months as the larger loan sizes and (tempoary) fee reductions and higher guarantee rates have stimulated demand," says Kurt Chilcott, who heads San Diego SBA lender CDC Small Business Finance. "And we're trying to gear up" to handle even more volume ahead including anticipated 504-related refi activity, he continues.

Dan Sight, a vice president with Reece Commercial in Kansas City and 2011 Chair of the National Association of Realtors' Commercial Committee, likewise describes the Act's 504 refi provision as having a potentially "huge" impact on the industry's looming maturity dilemma.

And the SBA itself is hiring more officials in its loan centers in anticipation that business property owner-users will tap the SBA 504 loan program to refinance maturing mortgages once that provision of the Act takes effect, Chilcott adds.

Banks hiring small business loan officers of late are anticipating that Act provisions will help boost activity far beyond the end of the year when the fee waivers expire and the 7(a) program's temporary 90 percent guarantee level reverts back to the standard 75 percent, says Bob Coleman, who publishes a popular online newsletter covering small business lending.

"We all understand that the 90-percent guarantee rate will go away," Coleman continues. "But the lending community is committed to the (SBA) programs and is embracing the higher maximum loan amounts" and eagerly anticipating the 504 refi rules.

Indeed the 504 expansion into refis could be a "huge" factor not only for small business borrowers and lenders, but also for the daunting general mortgage maturity issue the commercial real estate industry is facing, Coleman also stresses.

Based on the greater SBA lending activity already witnessed and additional small business lending certain to follow, the Act "is successful; it's doing what it's supposed to do which is to get capital to Main Street," Coleman concludes.

Meanwhile even as business borrowing remains generally weak, and lenders leery of regulatory adjustments generally assume cautious approaches to business lending, small businesses continue to lead the still modest economic recovery.

To wit, the Thomson Reuters/PayNet Small Business Lending Index was up 19 percent in October from its year-earlier level. That was the Index's third straight double-digit monthly gain - suggesting better hiring activity ahead at small businesses.

And small businesses (with fewer than 50 employees) accounted for some 54,000 of the 93,000 private sector hires in November, Automatic Data Processing reports.

All signs thus suggest that the Act is gaining strong traction, supporting small businesses as intended by Washington, and slowly helping to mend the economy one day at a time. The main concern among SBA lenders is that, because of the increased loan demand, the funding for fee waivers might run out before year end.

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