Sometimes what appears to be good news isn't. And we've been seeing a lot of that lately. The Small Business Administration (SBA) recently reported on its fiscal year 2010, which ended September 30. Despite much press about how small businesses are unable to get credit, the SBA loan approvals rose by 30% over those in 2009. The agency approved about 54,826 small business loans to the tune of $16.84 billion. Of course, that's still below the pre-recessionary levels of about $20 billion; still, it's not chump change.
If you're not familiar with SBA loans, they are essentially the government guaranteeing a loan up to 90% of its value, but the actual loans are made by commercial banks. What this means is that the government is reducing the risk for the banks. Now before you see this as yet another bank bailout, remember that the original purpose of the SBA program was to encourage banks to lend to riskier businesses (Wait! Doesn't that sound like the same thing the government did with housing, getting banks to lend to people who wouldn't qualify under normal circumstances? How did that turn out for everyone?). Today even relatively healthy small businesses are having trouble securing credit, so an increasing number of SBA loans are now going to businesses that used to be able to tap the conventional lending market.
Startups account for about 25% of the loans, with existing businesses of various types taking the rest. The vast majority of loans are for amounts less than $150,000. Of the 75% of loans that go to existing companies, about 46% are granted to minority-owned (ethnic) businesses and another 14% to women. The Small Business Jobs Act that was signed into law over a week ago enabled SBA to clear out their queue with more than $970 million in loans.
Now here's where it gets interesting. When SBA has to buy back the bank loans in default that it has guaranteed, it refers to them as "purchases." I guess that makes it sound more positive than bailout. SBA reports that during FY 2009 their costs for the business guaranty programs significantly increased from $2.1 billion in 2008 to $3.9 billion in 2009. They are expecting their costs to continue to increase in the coming year, which means more defaults. Let's see, what would Congress likely do in this scenario. I've got an idea! Let's give the SBA more money. And that's exactly what they did. The recent Small Business Jobs Act gave even more money to SBA to guarantee loans. Remember, this money is essentially your tax dollars being taken from you so the federal government can put your money into its bureaucracy to guarantee loans to businesses at risk. And you had nothing to say about it. Not sure that makes economic sense, but then I'm just a small business owner - what would I know?
