Amidst controversial plans for tax increases and entitlement curbs, President Obama's budget proposal for 2014, unveiled earlier this month, included a number of changes for the Small Business Administration and its lending procedures, generally aimed at making it cheaper and easier for small businesses to access small business loans.
The changes show a desire to support small business growth as well as increased faith in economic recovery. Under the new plan, the SBA's budget would be cut by $109 million from their 2012 operating budget to $810 million.
What does this budget reduction mean for small business lending? It indicates confidence in small businesses' prospects for the coming year -- fewer businesses are expected to default on 7(a) program loans and thus fewer funds to be necessary to cover losses.
Fee Reductions to Encourage Lending
In a bid to increase demand for small business loans, the budget proposal includes doing away with loan-origination and servicing fees for 7(a) SBA loans under $150,000. The 0.55 percent annual fee charged to lenders for the government's guarantee would also be eliminated.
- Under this plan, all 7(a) loan applications would go through an SBA ONE program: a simplified, fully digital procedure aimed at increasing the number of loan providers working with the SBA. The more providers who join the program, the more options borrowers have for obtaining a small business loan.
- This proposal follows improvements in efficiency due to paperwork reduction schemes in place since last June for the Small Loan Advantage program, which deals with 7(a) loans of $350,000 or less.
A similar move in 2009 under the American Recovery and Reinvestment Act proved successful in stimulating borrowing.
Renewal of Refinancing Options
Refinancing lets businesses establish long-term, stable financing, saving money which in turn can be used to finance business expenses or hire new employees. This means that small businesses who are looking to free up funds to apply to eligible expenses, such as building maintenance, rent and utilities, or equipment and inventory purchases, should review their current financing to determine if they will be qualified to refinance.
The proposed 2014 budget would revive the 504 Loan Refinancing program. This popular program, which expired last September, allowed businesses to refinance 504 loans for tangibles such as property. According to the Washington Post, many supporters of the program have called for it to be made permanent; the proposal to extend the program through September 2014 would be a step in that direction.
- Under the 504 Loan Refinancing program, commercial mortgages more than 2 years old, regardless of maturity, were eligible for refinancing. Borrowers could finance up to 90 percent of the value of available collateral; businesses can expect similar terms if the program is reinstated.
- Qualification also requires that any loans being refinanced be current for at least the past year and that the creditor on the original loan not be in a position to sustain a loss.
- Further qualifications may apply depending on the debt and the business, as well as the use to which the refinanced funds will be put-in general, funds that will be used for job creation or other public policy initiatives are more likely to qualify.
All this indicates a bright future for small businesses looking for funding. According to Biz2Credit's Small Business Lending Index, loan approval rates by small banks are at an all-time high; although approval rates are lower for big banks and credit unions, the incentives created by the 2014 budget proposals should help the credit market recover further and let small businesses access the loans they need.