Finally, after months of discussion and debate, a new small business initiative was launched yesterday, as President Obama signed the Small Business Jobs Act of 2010 into law! The bill has several major components, including the creation of a “small business lending fund”, SBA loan program changes to both the 7(a) and 504 loan programs, temporary tax breaks for small business investments and more favorable tax treatment of certain business expenses. But what will the net effect be to small businesses that need money, especially those that own or want to own commercial real estate?
Small Business Lending Fund – First, let’s address this new pot of money available to small banks. Under this program, banks with assets under $10 billion will be able to obtain very attractive additional funds from the U.S. Treasury. To qualify, banks will have to submit a ‘small business lending plan’ to Treasury. This truly should stimulate some additional small business lending by smaller, capital-constrained banks. Unfortunately, it does not appear the Treasury will be able to require that certain lending targets be met by banks, so there is a risk that the capital will be borrowed by banks but (much like with some TARP funds) not re-deployed to borrowers/businesses. However, from initial feedback in the marketplace, some banks are in fact putting plans together to immediately ramp up lending once they receive these new Treasury funds. Will they be a little less conservative in their underwriting, though? Will more businesses qualify for financing? Unfortunately, this is not at all certain.
Increased Loan Guaranties – Also impacting the banks and potentially their willingness to lend is the increase in the percentage of the government’s guarantee on SBA loans, from 75% to 90%. This is meaningful to banks but is only being offered per the bill until the end of 2010. So, while it could help push banks to be a tad more aggressive in their lending standards, in reality there is no time for it to have any real effect.
SBA Loan Limit Increases – The bill makes some temporary and some permanent changes to the most popular SBA loan programs – the 7(a) and 504 programs. The biggest news is the permanent change to the maximum loan sizes allowed under each program. The 7(a) program will now allow loans up to $5 million, and the 504 program will now also allow loans to $5 million (but given the structure of 504 loans, that translates into development projects or purchases of $12.5 million potentially now qualifying.) These loan limit increases will definitely benefit small businesses refinancing or acquiring commercial real estate, some of whom had needs for higher dollar amount that the SBA programs could historically accommodate.
SBA 504 Loans for Refinances – Also benefitting businesses owners that own their real estate, the 504 program will for two years be available for use in refinancing commercial mortgages that meet certain somewhat strict criteria. Though only a small % of businesses will be eligible, the main benefit of using the 504 program for refinances is in providing small businesses with fixed-rate loans at record low interest rates (recently under 5% fixed for 20 years.) Although temporary and narrow in eligibility, count this as a small win for small businesses with commercial real estate.
Elimination of SBA Loan Fees – Another notable element of the bill is the temporary elimination, yet again, of the loan fees associated with SBA loans. These fees, up to 3% of the total financing, will be waived but only through the end of 2010. This means that applicants only have a couple of months to start the loan application process if they want to benefit from these reduced fees. This is a great benefit for businesses, especially those borrowing larger amounts (loan fees on a $2 million loan would otherwise be over $50,000), but the short-lived nature of the provision is a frustrating déjà vu from earlier bills waiving these fees only for short periods.
Bottom line? The bill should provide some stimulus to small business lending, with some banks putting their toe back in the lending water, more businesses becoming eligible for financing, and more financing requests becoming eligible for approval. However, in counterbalance, some very helpful features will be short-lived, and there is not significant emphasis placed on incenting banks to expand qualification criteria for businesses or find opportunities to qualify more borrowers than they do today.