Most banks have plenty of money to lend, but many are understandably reluctant to extend credit to small businesses because they can't be sure they'll be paid back.
That's why, of all the ideas policymakers are considering to help spur small-business growth, the one that seems to make the most sense right now is keeping the Small Business Administration's loan guarantee at 90 percent through the end of September, and perhaps beyond.
The typical SBA guarantee is 75 percent to 85 percent (depending on the loan's size), but in February Congress temporarily raised the coverage level to 90 percent and waived most borrower fees as part of the $787 billion economic stimulus bill. The moves were such a boon for SBA lending that funds earmarked for the two incentive programs were exhausted by Thanksgiving, forcing Congress to appropriate an additional $125 million to keep them in place until the end of February.
The House has already passed legislation that would extend the higher guarantee through Sept. 30, and the Senate was expected to consider doing the same, though it had yet to take action as this issue went to press.
Raising the coverage level has its drawbacks, the most obvious being the added risk to taxpayers. If an SBA-backed loan goes bad taxpayers are on the hook for 90 percent of it, and it's reasonable to expect that, in this economy, more loans will falter, no matter how prudent the underwriting.
If I were a member of Congress I might also want to brace myself for some industry pushback when the guarantee amount reverts to pre-crisis levels. Bankers say it could be a while before the market for conventional loans returns to normal, and already some are lobbying to keep the guarantee at 90 percent well into 2011. They've become so comfortable with the 90 percent guarantee, in fact, that after the stimulus funds ran out on Nov. 23, many held out for it to be reinstated rather than originate loans with the lower guarantee.
That the higher guarantee has given bankers some much-needed peace of mind seems reason enough to extend it at least through the end of this fiscal year. In the nine months after the stimulus bill was passed, lenders originated $16 billion of SBA loans.
Weekly volume averaged $275 million for much of the year, compared to $165 million in the seven weeks prior to the Recovery Act's passage. It's fair to say that many of those loans would not have been made if not for the increased guarantee. Also, since banks only have to hold capital against the portion of an SBA loan that's not government-backed, the higher guarantee would free up a lot of capital that banks could use to make even more loans, SBA-backed or otherwise. Isn't that exactly what policymakers want?