SBA Has Killed Innovation in Small Business Lending
I got a note from some advocacy group asking me to lend my voice to stopping some cut in SBA lending. This is what they linked to:
A federal program designed to help small businesses with commercial real estate mortgages is coming to an end this week.
The U.S. Small Business Administration’s 504 loan refinancing program, which expires Thursday, allowed companies to refinance real estate and equipment loans.
SBA 504 loans for new purchases are still available.
I had a couple of thoughts
- Why do we need a government program for commercial real estate and equipment financing? These are the only two sectors of small business lending that are robust right now. I get 3 calls a week trying to give me equipment financing.
- The SBA has already pretty much killed small business cash flow lending. Basically, if you want a loan secured only by cash flow, the SBA is your only choice. Why would a bank make such a loan privately when they can make it and get an SBA gaurantee paid for by the client? As a result, no bank even has a desk for non-SBA lending, and since SBA lending is hard, many don't have an SBA desk any more.
I can't prove it, but I am convinced the SBA has killed innovation in the private lending market to small businesses.
Update: Another thought - the SBA is the barely-useful quid pro quo cited by statists from all the fantastically expensive and time-consuming regulation that gets dumped on small businesses. Well, I don't want it. I don't want to give statists any cover that this is somehow an equal bargain. It's a quarter flipped up on one side of the scale to balance ten tons of bullshit on the other side. It's like sending flowers to someone you raped.
Noah:
Is the SBA still acting as FEMA's bank?
October 1, 2012, 3:43 pmMike Baird:
I sold recourse lending products in the 90's. I have no doubt the SBA killed off development of new ideas on small business lending. The SBA loans were, for a given project, larger than what we would lend. In our recourse programs the equipment seller or the franchisor would backstop a portion of a portfolio. By the late 90's, these recourse programs were driven from the market by the SBA and companies such as FMAC that securitized and sold off their loans. The big non-bank SBA lenders also securitized their portfolios. The
October 1, 2012, 5:20 pmMike Baird:
Well, that didn't work right...
The big non-bank lenders also securitized their portfolios. Naturally, these portfolios were sold without recourse to the same buyers of CMO's, CDO's and the like. We all know what happened there.
The only thing left were the small deals that relied on the personal credit history of the principal who had to personally guarantee. This was mostly in the form of credit cards and other low/no document loans.
This of course limits the size of any loan to most small business to well under what the company could service or what the company might actually need to expand, etc.
Equipment leasing is about the only other thing available to the small business owner.
October 1, 2012, 5:23 pmDaniel Hill:
But everyone knows that all innovation in lending is just banks exploiting consumers, so if you are a statist the SBA killing lending innovation is a feature not a bug. More "one size fits nobody" solutions from people in government who have never had to balance a P&L for so much as a lemonade stand.
October 1, 2012, 7:02 pmErikTheRed:
What Mike said. We've dealt with it from the other side of the desk. Banks simply don't understand anything other than SBA guidelines. A few years ago we (naively) went through the process of putting together loan packages for a startup and submitting them (this was in 2008, right before things started getting ugly and the thought was "might as well get some money now while it's available"). The amount of cluelessness seen was pretty breathtaking. Basically, bankers (in general) know just enough about SBA guidelines to be able to semi-randomly throw stuff against the wall and see what sticks. Actual business knowledge? I couldn't find any.
It turned out OK in the end - we started much smaller than we wanted, but we've been hitting 20% - 35% annual revenue growth while showing operating profits, and are on track for nearly 50% this year (while nearly all of our competition is going out of business). It'll take us longer to reach our goals, but we'll get there and it's kind of fun knowing you did it without any debt. Bankers wouldn't know a good business plan if it hit them on the head.
October 2, 2012, 1:30 pm