How Much Sleep Should A 15 Year Old Boy Get Small Business Loan Update – Stimulus Bill Helps Bailout Businesses If They Cannot Pay Loans

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Small Business Loan Update – Stimulus Bill Helps Bailout Businesses If They Cannot Pay Loans

As we continue to scrutinize the more than 1,000 pages of the stimulus bill (the American Recovery and Reinvestment Act of 2009), there is one provision that doesn’t get much attention, but could be very helpful to small businesses. If you’re a small business and you’ve received an SBA loan from a local banker, but you’re having trouble making payments, you can get a “stabilization loan.” That’s right; finally some bailout money is going into the hands of small business owners, instead of going into the proverbial deep hole of the stock market or big banks. But don’t get too excited. It is limited to very specific cases and is not available to the vast majority of business owners.

There are some newspaper articles that boldly claim that the SBA will now provide relief if you have an existing business loan and are having trouble making payments. This is not an accurate statement and needs to be clarified. As seen in more detail in this article, this is wrong because it refers to problem loans made in the future, not existing ones.

Here’s how it works. Let’s say you are one of the lucky few who have found a bank that will give you an SBA loan. You continue on your merry way, but fall into hard economic times and have a hard time coming back. Remember that these are not conventional loans, but loans from an SBA-licensed lender that is guaranteed by the US Government through the SBA for default (depending on the loan, between 50% and 90%). Under the new stimulus law, the SBA may be able to help you. You will be able to get a new loan with which you will pay off the existing balance on extremely favorable terms, buying more time to revitalize the business and get back in the saddle. Sound too good to be true? Well, you be the judge. Here are some of the features:

1. Does not apply to SBA loans taken out before the stimulus bill. As for non-SBA loans, they can be pre- or post-enactment.

2. Does this also apply to SBA guaranteed loans or conventional non-SBA loans? We don’t know for sure. This statute simply states that it applies to “a small business that meets the eligibility standards and section 7(a) of the Small Business Act” (section 506(c) of the new Act). It contains pages and pages of requirements that can be applied to both types of loans. Based on some of the SBA’s preliminary reports, this appears to apply to both SBA and non-SBA loans.

3. This money is subject to availability in Congressional funding. Some think the way we’re going with our federal bailout, we’re going to run out of money before the economy we’re trying to save.

4. You don’t get this money unless you are a viable business. Man, you can drive a truck through that phrase. Our friends at the SBA will determine if you are “viable” (imagine how inferior you will be when you have to tell your friends that the federal government has determined that your business is “unviable” and on life support).

5. You must be suffering from “imminent financial hardship.” So much for withholding payments because you’d rather use the money for other expansion needs. How many months you have to be delinquent, or how close your foot is to the banana peel of complete business failure, is anyone’s guess.

6. It is uncertain, and commentators disagree, whether the federal government through the SBA will provide loans from taxpayer dollars or from private banks licensed by the SBA. In my opinion it is the latter. It has a 100% SBA guarantee and I wouldn’t make sense if the government itself was making the loan.

7. The loan cannot exceed $35,000. It is assumed that the new loan will be a “top-up” or refinancing of the entire balance on the old one. So if you’ve had a $100,000 loan that you’ve been paying on time for several years and now you have a $35,000 balance and you’re in trouble, do we have a program for you. Or maybe you have a smaller loan of $15,000 and need help after a short time. The law doesn’t say you have to wait a certain period of time so I imagine you could be in arrears after the first few months.

8. You can use it to make up no more than six months of monthly arrears.

9. The loan will be for a maximum period of five years.

10. The borrower will pay absolutely no interest for the duration of the loan. Interest may be charged but will be subsidized by the Federal Government.

11. Here’s the great part. If you get one of these loans, you don’t have to pay for the first year.

12. Absolutely no upfront fees are allowed. Getting such a loan is 100% free (of course you have to pay the principal and interest after the one-year moratorium).

13. SBA will decide whether collateral is required or not. In other words, if you have to put a lien on your property or residence. I suspect they will relent on this request.

14. You can get these loans until September 30, 2010.

15. Since this is an emergency law, within 15 days after the law is signed, the SBA must issue regulations.

Here’s a summary of the actual legislative language if you’re having trouble falling asleep:

SEC. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- Subject to the availability of funds, the Administrator of the Small Business Administration shall implement a program to provide loans on a deferred basis to viable (as such period is determined pursuant to regulation by the Administrator of the Small Business Administration) small businesses that have qualified small business loan and are currently facing financial difficulties.

(b) ELIGIBLE BORROWER – A small business entity as defined in section 3 of the Small Business Act (15 USC 632).

(c) QUALIFIED SMALL BUSINESS LOAN – A loan made to a small business that meets the eligibility standards in section 7(a) of the Small Business Act (15 USC 636(a)) but does not include loan guarantees (or loan guarantees). by the Administrator until the date of entry into force of this law.

(d) LOAN SIZE – Loans guaranteed under this section may not exceed $35,000.

(e) PURPOSE – Loans guaranteed under this program shall be used to make periodic payments of principal and interest, either in whole or in part, on an existing qualified small business loan for a period not to exceed 6 months.

(f) LOAN TERMS – Loans made under this section:

(1) carry a 100 percent guarantee; and

(2) have interest fully subsidized for the repayment period.

(g) REPAYMENT- Repayment of loans made pursuant to this section shall–

(1) amortize in a period not exceeding 5 years; and

(2) begins only 12 months after the final payment of the funds.

(h) SECURITY- The Administrator of the Small Business Administration may accept any available collateral, including subordinated liens, to secure loans made under this section.

(i) FEES- The Small Business Administration Administrator is prohibited from charging any processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, and other fees that may be charged to an applicant for credit for credit under this section.

(j) CONCLUSION- The Administrator of the Small Business Administration shall not issue loan guarantees under this section after September 30, 2010.

(k) RULE-MAKING AUTHORITY FOR EMERGENCY SITUATIONS – The Administrator of the Administration for Small Businesses shall issue regulations in accordance with this Article within 15 days from the date of entry into force of this Article. The notice requirements of section 553(b) of title 5, United States Code, shall not apply to the publication of such regulations.

The real question is whether a private bank will lend under this program. Unfortunately, few will do this because the statute is very clear that no fees can be charged and how the bank can make money if it lends in such circumstances. Sure, they could make money on the secondary market, but that has dried up, so they’re basically being asked to lend out of the goodness of their hearts. On the other hand, it carries the first state guarantee of 100 percent, so the bank knows that it will receive interest and will not be able to lose a single coin. Maybe this will work after all.

But there is something else that would interest the bank. In a sense, this is a form of federal aid going directly to small community banks. They have delinquent loans on their books and could easily take the chance to get them out of this program. Especially if they were not the recipients of the first TARP money. Contrary to public opinion, most of them did not receive any money. But again, this may not apply to that mutual bank. Since they typically package and sell their loans within three to six months, they probably wouldn’t even be in default at that point. That would be in the hands of secondary market investors.

So is this good or bad for small businesses? Frankly, it’s good to see some bailout money going to small businesses, but most of them would rather have a loan in the first place than a bailout when they’re in default. Unfortunately, this will have limited application.

Wouldn’t it be better if we just expanded our small business programs so more businesses could get loans? How about the SBA creating a secondary market for small business loans? I have a new idea: forget about outstanding obligations for now and concentrate on providing business loans to startups or existing businesses that want to expand.

How about having a program that can pay off high interest credit card debt? There is almost no business that is not financed by credit cards these days, simply because banks do not give loans. It’s not unusual for people to have $50,000 plus on their credit cards just to stay afloat. Talk about big interest savings. You can imagine how much cash flow this would give a small business.

We should applaud Congress for doing its best on short notice to come up with this plan. Sure, this is a form of small business aid, but I believe it misses the mark for the majority of the 27 million business owners who are simply looking for a loan they can pay off, as opposed to aid.

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