American Recovery and Reinvestment Act Changes for the SBA
Information below submitted to EDC by Dennis Larkin, SBA
On February 17, President Obama signed the American Recovery and Reinvestment Act, which is designed to grow the economy, jumpstart job creation, re-start lending, and increase investment in small business. The U.S. Small Business Administration (SBA) has a major role in this effort. In particular, we have several changes to our programs.
1. Temporary elimination of loan fees: our basic 7a program normally carries a guarantee fee to the borrower of 2% to 3.5%. Those fees will be eliminated until the money runs out, which should be the end of December. Fees on our 504 capital asset program typically come in around 3%; these fees are also eliminated. Fee elimination is retroactive to February 17, and we have a mechanism in place to refund fees paid since then.
2. Temporary 90% guarantees: with the exception of our SBAExpress program, the guarantees on our loan guarantee programs are raised to 90%. Previously our guarantees were 75% or 85%. This is the highest guarantee the SBA has ever offered lenders. The maximum dollar amount of each guarantee remains $1,500,000, so the largest loan at 90% will be $1,666,666.
3. 7a Secondary Market Liquidity: SBA guaranteed loans can be sold on the secondary market, but this market has dried up since the economy began to struggle. One component of the ARRA is to allow loan brokers or dealers to borrow money from SBA with which they can buy loan guarantees from lenders and sell them on the secondary market. This should help the secondary market to begin moving again; lenders will be able to sell loan guarantees if they choose.
4. ARC Loans: America’s Recovery Capital (ARC) Loans are available from the SBA to help viable small businesses that have had trouble making payments on business loans. ARC Loans provide lenders with a 100% guaranty on deferred-payment, no-interest loans up to $35,000 for short term payments of principal and interest on existing loans. Qualifying debt includes mortgages, lines of credit, leases, notes payable and credit cards. SBA loans made after February 17, 2009 are also eligible. ARC Loans are disbursed over a 6 month period, followed by a one year deferment on repayment, at the end of which time the borrower has a five year term to repay the loan. Borrowers will repay loan principal only; interest will be paid the lender by SBA.
5. Expanded Microloans: The SBA has provided an extra $50,000,000 to microlenders across the country. These are non-profit community based lenders that make loans up to $35,000 each. Every microloan borrower receives training and technical assistance. This program is already in place, so you merely need to visit a microlender to apply.
6. Surety Bond Program expansion: Surety bond limits will be raised to $5,000,000 from $2,000,000 (and up to $10,000,000 on some contracts) thus helping more small businesses to compete for the billions of dollars of contracts flowing from the ARRA. SBA doesn’t issue bonds directly to the contractor, but to a bonding agent the contractor chooses. SBA guarantees bid, payment, and performance bonds to protect the project owner against financial loss if contractors default or fail to perform. Presently there is no SBA surety bond firm for Iowa but attempts are being made to attract one.
7. 504 Program loan guarantees and secondary market creation: Presently our 504 Program offers lenders a first position for their 50% loan, but no guarantee. ARRA will create guarantees for lenders on these first lien position loans which then allows them to be sold on the secondary market like other SBA loan guarantees, creating fresh liquidity for the 504 program.
8. 504 Refinancing program: The 504 program can now be used to convert existing business loans into SBA 504 loans, restructuring and refinancing them. There must be a 10% reduction in the old payment, and the refinance portion can’t exceed 1/3 of the total project.
9. SBIC program expansion: The Small Business Investment Company program is a venture capital program for small businesses. The SBA will offer these SBIC companies additional financial assistance in return for their using this added capital to invest a portion of it in smaller enterprises.
Further Changes in SBA Loan Programs
10. Size Standard Changes: The SBA has temporarily expanded our size standards for lending purposes through September 30, 2010. We now can help finance any for-profit business that has a maximum of $3 million in annual after-tax profits, averaged for the past two years. The business can have no more than $8.5 million in tangible net assets.
11. Business Disaster Loan Restructure: Businesses that received SBA disaster loans following the 2008 floods and tornadoes in Iowa will have an opportunity to propose a restructuring of those disaster loans. Borrowers wanting to take advantage of this opportunity are to visit with the Small Business Development Centers (SBDC) or SCORE to evaluate their business’ financial prospects and to create a proposed restructuring of the firm’s disaster loans. SBA Disaster officials will evaluate the proposal and get the business a decision in quick order. These loans will change the payment, but not the interest rate or the loan term.
12. Dealer Floor Plan Financing: This is a program to help new and used auto dealers. The SBA will provide loan guarantees for lines of credit through SBA lenders for titled inventory, including autos, RVs, manufactured homes, boats, motorcycles, snowmobiles, mobile homes, and farm equipment. The pilot program runs through Sept. 30, 2010. DFP loans will be available for a minimum of $500,000 up to $2 million, with a term of five years, and a 60% to 75% government guarantee. Lenders can advance 90% on new cars and light trucks, and 80% on other inventory. Borrower fees are eliminated under this pilot program.
Modifications to SBA’s Contracting Programs
13. Recovery.gov: The SBA is committed to helping small businesses receive their share of contracts funded under the American Recovery and Reinvestment Act (ARRA). To that end, it refers potential contractors to a central registry of state and local contracts that are shovel-ready at www.recovery.gov. Small businesses can identify all federal contracts above $25,000 at the FedBizOpps site, www.fbo.gov And prime contractors can be identified for subcontracting opportunities through the Electronic Subcontracting Reporting System (eSRS) at www.esrs.gov
