Monday, November 10, 2008

Problems with SBA Loans?

SBA loans scarce in these hard times | | The Indianapolis Star
"SBA volume is significantly down, and one might argue that it's happening at a time when small business needs access to capital more than ever," said Chris Reilly, president of CIT Small Business Lending Corp. of Livingston, N.J., which ranks among the top SBA lenders nationwide.

The SBA reported recently that loan volumes made under its flagship 7(a) loan program fell 30 percent in the fiscal year ended Sept. 30. And in October, overall SBA loan volumes were 50 percent lower than in October 2007, mainly because of sharp drops in the SBA Express loan program that makes smaller loans, said Eric Zarnikow, head of the SBA's Office of Capital Access.


In recent weeks, however, lenders are reporting yet another problem
with their SBA lending programs. Banks and lenders can't sell
SBA-backed loans to other institutions on the secondary market, which
many lenders rely on to free up capital to issue new loans.

reason: Returns on SBA-backed loans are pegged to the prime lending
rate, which has fallen in line with Federal Reserve cuts in key
interest-rate targets. Yet, for most potential investors, the cost of
obtaining capital to buy those loans -- determined by the London
interbank offered rate, or Libor -- has soared as the Wall Street
financial crisis hit credit markets. That has made the SBA loans a much
less attractive investment for buyers.

The two rates recently began reverting to normal spreads. But it's unclear how long it will take for SBA lending to recover.