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Cascade: No. 71, Spring/Summer 2009

Recovery Act Gives SBA Tools to Boost Small Businesses

The Obama administration has taken steps to alleviate the small business credit crunch by offering new incentives to small business borrowers and lenders through the American Recovery and Reinvestment Act (ARRA) and by actions of the Department of the Treasury.

With tax incentives and steps to encourage lending, the ARRA recognizes that assisting small businesses is an important step toward getting our economy moving again. The bill’s primary goals for the U.S. Small Business Administration (SBA) are jump-starting job creation, restarting lending, and promoting investment in small businesses.

The ARRA provides entrepreneurs and lenders with financial relief during the current economic crisis that will help encourage borrowing and lending to all small businesses, including start-ups.

For small businesses, the act temporarily eliminates SBA-guaranteed 7(a) and 504 loan fees and offers tax credits. For lenders, it temporarily eliminates 504 loan fees. The fee eliminations are retroactive to February 17. The SBA is developing a mechanism for refunding fees paid on loans since then.

The act also supports guarantees of up to 90 percent on most types of 7(a) loans to qualified small businesses. The temporary loan fee eliminations and 90 percent guarantee provisions will apply to approximately $8.7 billion in 7(a) loans and $3.6 billion in 504 loans. The SBA estimates that this will cover lending in both programs through the calendar year of 2009.

In addition, the Treasury Department will commit up to $15 billion in funds from the Troubled Asset Relief Program (TARP) to help unfreeze small business lending. This will particularly benefit community banks, credit unions, and other small lenders. The Treasury will purchase existing and new SBA-backed loans made by banks, freeing up more capital so these banks can restart their lending to local small businesses.

The act provides the SBA with $730 million, including $375 million to cover the costs of temporarily eliminating loan fees and raising guarantee limits on some loans, $255 million for a new loan program to help viable small businesses with immediate economic hardship make payments on existing loans, and additional funding for SBA-backed microlenders.

The ARRA also authorizes the SBA to use its 504 program to refinance existing loans for fixed assets as part of a business expansion project; to use its guarantee authority to establish a secondary market for bank loans made under the 504 loan program; and to make loans to broker-dealers who buy SBA-backed loans from lenders and pool them for sale to investors.

Also under the act, small businesses that need surety bonds to compete for construction and service contracts can qualify for SBA-backed surety bonds of up to $5 million, more than double the previous maximum of $2 million.

Another element of the ARRA that is already in place is the SBA’s microloan program. These nonprofit, community- based lenders make loans of up to $35,000 to small businesses and start-ups. Because this program is already operating, a borrower can go to a microlender today and apply for a loan.* The act funds $50 million in new loans by these lenders, plus $24 million to help pay for the technical assistance and training they provide to loan applicants.

We have already seen significant interest in a new program, America’s Recovery Capital (ARC) Loan Program, by both lenders and small businesses. Once in place, this temporary new program will offer deferred-payment loans of up to $35,000 to viable small businesses that need help making payments on an existing, qualifying loan for up to six months. These loans will be 100 percent guaranteed by the SBA. Repayment would not have to begin until 12 months aft er the loan is fully disbursed, giving small businesses time to refocus their business plans in order to succeed in the long run.

The ARRA helps SBA-licensed investment companies by raising the level of SBA funding they can receive to make venture capital investments in small businesses. It also raises the percentage of their investments that must be made in smaller businesses from 20 percent to 25 percent.

For further details, visit www.sba.gov External Link. David C. Dickson can be reached at david.dickson@sba.gov E-Mail. In New Jersey, contact James A. Kocsi at james.kocsi@ sba.gov E-Mail. In Delaware, contact Jayne E. Armstrong at jayne.armstrong@sba.gov E-Mail.