Those Seeking Loans Are Left in the Lurch by Erratic Funding

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The Wall Street Journal
By: Emily Maltby
April 8, 2010

Congress has infused a popular small-business loan program with capital three times to keep it running. But the short-term renewals, rather than the government committing to the program long-term, are causing some business owners to fall through the cracks of the lending process.
Bill Cimino was approved for a $1.6 million loan last year to purchase the property on which his Wilmington, Mass., car dealership sits. The loan was backed by the Small Business Administration and--thanks to the government stimulus program--carried no borrower fees and provided his lender with a substantial guarantee against default.

The loan was scheduled to close at the end of December, to coincide with the end of his lease, but paperwork delays pushed it until February--just as the stimulus money for the program ran out.

Mr. Cimino was faced with a choice: His loan application could be processed quickly without the stimulus perks--costing him $43,000 in fees--or be placed on a waiting list in the event more stimulus funds became available.

Being already two months behind schedule, the latter seemed unwise. "I needed to close the loan," he says.

Three days after Mr. Cimino decided to move forward with the closing, legislation passed to restore the stimulus program, but it was too late to reprocess the loan without the fees.

Lenders have historically issued loans backed by the Small Business Administration as a means to accommodate some of their more-risky Main Street customers because up to 75% of the loan would be reimbursed by the government in the case of default.

But in the depths of the credit crunch, lenders weren't enticed by the 75% guarantee and SBA lending plummeted. That prompted Congress to include provisions in last February's Recovery Act that temporarily boosted the government guarantee to 90% and dropped fees associated with the loans.

Thanks to those provisions, SBA loans have increased as other bank financing has slipped. In the government's most recent fiscal quarter, the number of 7(a) loans--the SBA's most popular form of funding--jumped to 16,558, twice as many as in the year-earlier quarter. The total dollar amount more than doubled, hitting $3.75 billion.

When funds had exhausted for the first time in November, business owners who opted for the waiting list had to hold out for weeks before Congress passed legislation to continue the program.

After Mr. Cimino's ill-timed predicament, funds depleted for a third time at the end of March. Congress passed legislation immediately, reviving the program until the end of April. But business owners were still left in limbo for several days.

In total, $600 million has been allocated to the program, which has supported more than $23 billion in loans. But beyond its overall success, "this starting and stopping has a detrimental effect," says SBA spokesman Jonathan Swain. "The unpredictability of when [funds] are available puts clients in a position where they have to ask, 'Do I need the money now or wait?'"

Kevin Tenpas, president and chief executive of Heartland Business Bank in De Pere, Wis., says clients are frustrated when he explains that their loan is contingent on government funding. He says the program should be extended for a longer period of time "so business owners and lenders can plan."

There is bipartisan support for a longer-term extension. "A long term solution is our goal, but to get a bigger package passed, that takes more time," says Richard Carbo, spokesman for the U.S. Senate Committee on Small Business and Entrepreneurship. Several pieces of pending legislation call for longer extensions and Mr. Carbo says the Senate Small Business Committee wants to pass a version before the end of April, to avoid lag time. "It is a priority, but we don't know what negotiations will be like," he says.

Meanwhile, Mr. Cimino is hoping the SBA will take exception to his case and help him gain back some of the fee money. In the event nothing can be done, he's wondering how to cut overhead to compensate for the incurred cost. "Do you want to tell me which employee I'm going to cut to pay for that $43,000?"

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