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Laudable loans

Small Business Administration loans make financing business purchases and growth possible for many local business owners.

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From the pages of In Business magazine.

A decade removed from the height of the Great Recession, it’s apparent the local and state appetite for small business borrowing has fully returned, healthy and strong.

Banks are certainly eager to lend again, which is as sure a sign as any that there’s faith in the strength of the economy and borrowers’ ability to repay their loans.

The first quarter numbers from 2018 on banking released by the Federal Deposit Insurance Corp. (FDIC) show that Wisconsin bank performance continues to be strong across the board, according to Rose Oswald Poels, president/CEO of the Wisconsin Bankers Association.

Wisconsin bank lending increased in almost every single category in a year-to-year analysis, with commercial lending showing the biggest growth (7.8%). Overall lending grew 4.9% during the same timeframe. Non-current loans (those behind in their payments) continued to decrease, dropping to $680 million, down 16%.

“Wisconsin’s banking industry reflects Wisconsin’s current healthy economy, as well as the overall national trends,” said Oswald Poels in a release. “The current economic expansion is now the second longest on record.”

That confidence is backed by a Congressional effort at the federal level to strengthen the Small Business Administration (SBA) 7(a) loan program.

Having already been approved by the House and Senate this spring, the bipartisan Small Business 7(a) Lending Oversight Reform Act (H.R. 4743) includes targeted reforms to ensure the program continues safely expanding the reach of lending and credit services to a broader range of borrowers who would not qualify for a conventional bank loan. The bill now awaits the president’s signature.

Once it becomes law, H.R. 4743 will:

  • Strengthen the integrity of all SBA guaranteed lending programs by codifying the SBA Office of Credit Risk Management and Lender Oversight Committee, increasing transparency in the office’s budget and providing guidelines for lender reviews and lender appeals rights;
  • Safeguard the 7(a) program from abuse by codifying the SBA’s “Credit Elsewhere Test,” which requires lenders to fully substantiate and document the reasons a given applicant cannot be served with conventional credit; and
  • Stabilize 7(a) program funding by allowing the SBA to lift the cap on general business loans by up to 15% of the limit if it is determined the cap will be reached, as it was in 2015, which disrupted SBA lending.

This all comes on the heels of the Economic Growth, Regulatory Relief, and Consumer Protection Act becoming law in late May. This legislation is the first major change to the Dodd-Frank Act since its passage in 2010 and had bipartisan support in the Senate and House.

The law provides regulatory relief for banking institutions by raising the threshold at which annual risk oversight measures apply — measures such as stress tests and regulatory compliance — increasing it to $250 billion from the current $50 billion. For those institutions with total assets between $50 billion and $100 billion, the regulatory relief is immediate. For those with total assets between $100 billion and $250 billion, the relief is phased in over 18 months. The legislation also provides relief from the Volcker Rule, which banned proprietary trading by commercial banks, for banking institutions with assets under $10 billion.

These measures are a potential boon for small business borrowers seeking access to more credit, even though SBA lending alone doesn’t tell the full story of small business lending, notes Eric Ness, district director for the Wisconsin District Office of the U.S. Small Business Administration.

“To some extent, it is counter-cyclical. In other words, when the economy is good, lenders are probably doing more conventional small business loans relative to SBA-guaranteed loans,” Ness explains. “When the economy is bad, they lean more on the SBA product with its guarantee of 50% to 90%.”

During the Great Recession, for example, the Jobs Act of 2010 was intended to kick start SBA lending at a time when banks did not want to lend at all.

The SBA has two business lending programs. The most heavily used SBA program is the 7A, a guaranteed program in which borrowers work with a local bank or credit union lender for everything from working capital, to machinery and equipment, to buildings and real estate. The SBA’s 7A loans are guaranteed up to 85% to a maximum of $150,000 and up to 75% for loans between $150,000 and $5 million.

The SBA’s 504 program covers fixed assets like buildings, real estate, and equipment, and borrowers can work with local lenders or a certified development company. Under a 504 loan, 50% would come from the financial institution, 40% from the SBA, and 10% from the borrower; the local lender gets first collateral position. Borrowers can also now refinance under the 504 program.

Ness says that the guaranteed program removes much of the risk for banks, incentivizing them to make loans they would not otherwise make.

According to Ness, lenders make the determination about whether a borrower is a good risk for an SBA loan or a conventional loan; however, SBA does look for whether the loan meets eligibility requirements for the following: size standards; the nature of the business (i.e., no lending to gambling establishments or strip clubs); how the proceeds will be used; whether the borrower could obtain credit elsewhere; whether the loan is for a sound business purpose; and whether it will reasonably assure repayment. Owners also need to provide a personal guarantee.

SBA loans are also an ideal financing source for startup businesses.

“Every SBA lender — and we have about 170 active SBA lenders in Wisconsin — is different, but typically we have seen more than one-third of SBA-backed loans go to startup businesses, and this year that number has been higher, close to or even over 50%,” says Ness.

“The SBA guarantee makes it easier for the lender to take the risk, and SBA-backed loans have longer terms, which makes for stronger cash flow for the business, as well as lower down payments,” continues Ness. “SBA also offers lines of credit.”

Close to 200 Dane County businesses — existing or new — take advantage of the SBA’s loan programs each year for everything from purchase costs, to short-term financing for inventory maintenance, to loans for larger expansion projects. IB spoke with three local small business owners who have each dipped into SBA financing to establish and grow their businesses and contribute to the Greater Madison economy.


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