Wednesday, April 30, 2008

SBA - Loans Down & Delinquencies Up

SBA loan volume and dollar amounts have for both the 7a loan and 504 loan programs have declined for fiscal year 2008 while loan delinquencies have grown steadily since last summer according to The Coleman Report. The Coleman Report was an attendee for Erik Zarnikow's remarks at the America East Conference for SBA lenders. Erik Zarnikow is the Associate Administrator for Office of Capital Access at the SBA.

Here are a few excerpts from Zarnikow's speech as noted in The Coleman Report with my thoughts in between.

"Most of the decline in loans is smaller loans typically used for working capital purposes. We are seeing a fairly steady demand for loans used to expand businesses, buy equipment, buy real estate, and buy fixed assets. "
In my opinion, the 7a Express product is a great financing solution for small businesses needing working capital as it's a revolving line of credit. In this current economic environment, working capital is more heavily in demand than expansion capital.

Some of the lenders with whom I work have been unwilling to offer the 7a Express solution or are pulling back. Why? I'm guessing it is because the SBA guarantee level is only 50% compared to 75% and higher on the 7a term loan product. I have never understood the rationale for this lower guarantee. The revolving nature of the product and the lower guarantee likely makes it more difficult if not impossible for the lenders to sell the loans in the secondary market. Lower income potential and greater risk - not difficult to see why SBA working capital loans are more difficult to obtain.

"When we talked with the lenders we found that they pushed the credit box too far. The losses were bigger than expected and they pulled back."
After a period of easy money, the wheelbarrows of money are no longer on the front porch. The pendulum has now swung to tighter underwriting criterion. The last credit crunch for business lasted three years (1989-1992) – I don’t expect the current version to go away quickly. Remember, if you’re not bankworthy, there are other financing solutions that are available including asset based revolvers, factoring, purchase order financing and equipment leasing. Some are only marginally more expensive than bank debt. Others – well, it is a risk versus return formula.

"As the economy softens, we are seeing more businesses have cash flow problems. In the SBA 7(a) loan program, delinquencies have climbed to 2.77%. Delinquencies have climbed to 2.17% in the 504 loan program. Overall, delinquencies have continuously climbed since the summer of 2007, which is reflected in the overall commercial lending portfolio. "
In November, I noted that lessee payment delinquencies of greater than 90 days had almost doubled in the last 15 months. An increase in SBA loan delinquencies should not be a surprise to anyone.

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans" and give me a call!

Tags : SBA , 7a loan , 504 loan , working capital , Coleman Report , Erik Zarnikow

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