Money Talk: Financing options in today’s downturn

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Many within the rural building industry may find it difficult to believe the recession ended. According to the experts, at least, the end came in summer of 2009.

Three months later, however, U.S. Treasury Secretary Timothy F. Geithner voiced what was already widely known: “This credit crunch is not over.”

The treasury secretary’s statement, “It may feel dramatically better for large companies, but it is not over for small businesses across the country,” was prophetic. Several days later, CIT Group Inc., the company that provides badly-needed credit to thousands of small and mid-sized businesses, many in the retail sector, filed for Chapter 11 bankruptcy.

The lack of available capital has affected every contractor and building business and appears to be continuing as a major concern for the foreseeable future. The Federal Deposit Insurance Corporation (FDIC), for example, recently reported that lending at U.S. banks fell 3 percent in the third quarter of 2009, representing the fifth consecutive quarter in which banks have reduced lending.

Surprisingly — and frustratingly — the FDIC report revealed that the largest banks, meaning banks that received billions in taxpayer dollars via the Troubled Asset Relief Program (TARP), were responsible for a disproportionate amount — nearly 75 percent — of the lending decline.  What’s more, this occurred during a period when banks posted aggregate profits of $2.8 billion.

What’s a small business to do?

With all available capital apparently going to big business and government, what can the average, financially-strapped building business do?  Fortunately, there are a few bright spots among the clouds.

As part of the American Recovery and Reinvestment Act of 2009, the maximum guarantee on U.S. Small Business Administration (SBA) 7(a) loans was increased to 90 percent and borrower fees were temporarily eliminated for the 7(a) program as well as for both borrower and lender fees for 504 loans.

The SBA’s primary and most flexible 7(a) Loan Program is designed for both start-up and existing small businesses, and involves government-backed guarantees for amounts loaned for general business purposes.  Last spring, the treasury and the SBA announced a joint initiative to make direct purchases of securities backed by 7(a) loans on the secondary market in the hope of freeing capital and encouraging more small business financing.

Expansion of the SBA’s Surety Bond Program now allows builders and other small businesses to compete for contracts by raising the maximum amount for contracts that qualify for SBA surety bonds to $5 million, with up to $10 million for certain contracts.

The SBA’s CDC/504 Loan Program provides long-term, fixed-rate financing to acquire fixed assets (such as real estate and equipment) for expansion or modernization.  It is ideal for small building businesses requiring “brick and mortar” financing.  Rather than commercial lending institutions, 504 loans are delivered via CDCs (Certified Development Companies) — private, non-profit corporations set up to contribute to the economic development of their communities.

SBA increases efforts, too

The SBA itself is increasingly involved.  The SBA’s weekly loan volume is up more than 75 percent since the beginning of the year. They have expanded 7(a) loan eligibility to more than 70,000 businesses through alternative size standards and recently proposed increasing the size definitions for three broad commercial sectors, two-thirds in the retail sector.  Since February 2009, more than 900 lenders who had not made SBA loans since 2007 participated in SBA lending programs.

The SBA’s unique program provides small (up to $30,000), short-term “Microloans” for working capital for the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment.  Ideal for really small-scale financing, SBA microloans are delivered through specially designated intermediary lenders (non-profit organizations with experience in lending and providing technical assistance.

One Microloan Program, the America’s Recovery Capital, or ARC, loan program provides viable small businesses suffering immediate financial hardship some temporary financial relief so they can keep their doors open and get their cash flow back on track.

An ARC loan is a deferred-payment loan of up to $35,000, 100 percent guaranteed by the SBA.  In addition to no interest charges to the borrower, the SBA will pay the monthly interest at the rate of Prime plus 2 percent to the lender on behalf of the borrower.  After a 12-month deferral period, the borrower pays back only the ARC loan principal over a period of five years.  To date, more than 4,000 ARC loans totaling $130 million have been granted to viable small businesses.

Microloan sources range  from banks and credit unions to community development organizations. The non-profit Web site Kiva.org, the world’s first person-to-person micro-lending web site, has traditionally facilitated microloans only in developing countries. Those requiring really small amounts of capital will be pleased to learn Kiva began testing a new micro-lending program in the U.S. early in 2009.

Finding a source of financing was tough for many building business owners and managers even before the current economic downturn.  Fortunately, a number of strategies have been developed and employed to open doors far beyond the conventional bank, government or government-backed financing we are all so familiar with.

As part of its “Financial Stability Plan to Increase Small Business Lending,” the White House recently announced new programs designed to increase access to credit for small businesses. These programs support institutions that do a disproportionate share of their lending to small businesses through:

• An initiative that provides lower-cost capital to community banks that submit a plan to increase small business lending;

• A program to support Community Development Financial Institutions lending to small businesses in hardest-hit rural and urban communities; and

• New Markets Tax Credit, enhanced under the 2009 Recovery Act, and with an additional $3 billion in its coffers, offers a tax credit, a direct reduction of an investor’s tax bill, as opposed to a deduction from the income upon which that tax bill is based, for those investing in entities whose primary mission is to provide investment capital for low-income communities or persons.

What’s ahead?

While the administration pressures the banking industry to lend more, regulators are demanding banks and financial institutions ramp up their capital ratios and cut back on lending when they see default risk on the horizon. A more optimistic U.S. Treasury Department,  however, feels the secondary markets have recovered and small business funding is already increasing.

In January 2009, the total volume for loans settled from lenders to broker-dealers on the secondary market for SBA loans had fallen to just $85.9 million.  From May to October 2009, however, the average monthly volume settled to broker-dealers was $344 million – above pre-crises levels.

Much of this can be credited to the TALF program which has financed more than $1 billion in purchases of SBA securities. A more recent announcement of a secondary market purchase program under the Financial Stability Plan has also helped unfreeze the markets, providing lenders with the promise of liquidity if they make new loans.

Every potential borrower should begin at the SBA Web site (www.sba.gov). Microloans are provided by a variety of sources, ranging from banks and credit unions to community development organizations.

And, perhaps surprisingly, commercial banks and other financial institutions remain a good starting point for every contractor, builder and building business in need of funding to weather the current economic downturn. RB

Mark Battersby, an authority on tax and financial matters, has more than 30 years experience in small business issues. He lectures and writes extensively on business topics. Reach him at 610-789-2480 or at MEBatt12@Earthlink.net.

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