SBA loans and in particular, SBA 7a loans are down substantially
year to date, by 57% according to the Small Business Association. We all know the bad news, but what are the
issues specifically? Frozen secondary market and little known fees for the lenders.
The main problem
for SBA 7a loans currently, is that the commercial secondary market for these types of loans are completely frozen
and has been for over 6 months. What this means is that investors do not want to buy this debt. Without
investors buying loans of the secondary market, banks do not have the ability to "recycle" their capital. Most
modern banks are not set up to hold onto to debt long term, like it was done in the past.
Under a healthy market,
banks are able to originate, fund and sell off their SBA loans for a substantial profit. Most importantly,
with this system they not only make a profit but they get their capital back, so that they can go out and fund
another loan. In addition, many banks have miss timed the markets and have a substantial amount of SBA loans
stuck on their balance sheets, which have further slowed or stopped their lending.
One of the other major issues here, which is
really not well known to the public, is that the fees for lenders, charged by the SBA, to the funding banks, are
expensive. With premiums dropping substantially for banks, the SBA fees have become that much more
restricting. Banks and lenders have asked and where hoping for a reduction with the Stimulus Package but did
not get one. Due to this issue coupled with the additional paperwork for banks to work with the SBA many have
simply pulled out, as it not being profitable enough to justify the work.
The solution to both of
these issues could very well be what Obama already put in to action. With $50 billion being
deployed at the end of March, for the government to buy commercial debt frozen on the secondary market, many
experts believe that this is the best move available and that it should work. The analogy of the market being
frozen is very fitting. With the bulk of the ice being broken (bought) the river should begin to flow once