By Michael F. Carmichael
Jan. 5, 2012
There are weeks, even months, when every day seems like Monday to some small business owners. There is a speck of light at the end of the tunnel - consumer confidence is rising, clients are starting to talk about buying more, good economic news seems to be outweighing the bad.
There’s that nagging problem of needing some additional funding to kickstart the business and get it ready to be able to meet increased client needs, or just keeping afloat until you get paid for that last client job.
That’s where a newly modified SBA-guaranteed loan program can help.
Jeanne Hulit is the acting associate administrator for the SBA. She’s been a bank lending officer in a previous life as well as being an officer in Maine’s economic development office. She not only knows that small businesses need money to grow but what makes banks need to say “approved” to a loan application.
Hulit says that speck of light at the end of the tunnel isn’t a train. “Over the last six consecutive quarters there has been an easing of small business credit standards, as reported by the Federal Reserve. We’ve seen an increase in small business lending, so we are seeing an improvement.”
The SBA has played a sizable part in that improvement. Hulit says “The SBA just came off of the highest year ever in our 50-year history of supporting credit to small businesses.”
What does that mean in terms of real money and real businesses? “We supported more than $30 billion in lending to more than 60,000 firms. We do see things going in the right direction.”
Historically, according to Hulit, banks have required all of a loan to be collateralized. For many of the small businesses Corp! has talked with this has often meant having “offsetting deposits” - keeping enough money in a bank account to equal the amount of the loan - resulting in those small business owners saying, “If I had enough money to keep in the bank I wouldn’t need the loan!”
“The SBA provides a guarantee to banks,” explains Hulit. “It enhances their underwriting when there might be a collateral shortfall, so if a small business owner doesn’t have those offsetting deposits, the SBA is a way to go. That’s our traditional lending.”
The SBA traditionally has guaranteed term loans. “Fixed principal and interest payments over an extended period of time,” Hulit says. “Because the loans are guaranteed, banks can offer a longer repayment schedule, which reduces the monthly payment.”
The newly modified CAPLines program provides an SBA guarantee for revolving lines of credit. That’s the kind of financial safety net that realizes the real world doesn’t work on the kind of structure required by term loans. According to Hulit, “As we’re coming out of this recession, one of the many things that small businesses need is working capital. They need to rebuild their inventory, their receivables are growing and they’re offering terms to their buyers so they need the working capital support for that period of time.”
There are two kinds of CAPLines: the lines of credit version and something called the Contract Line. The latter is particularly important for construction contractors or contractors that are doing work for the government says Hulit. “When they get a big contract order or a big government order they may not have the working capital to meet that order. The contract line is an SBA-guaranteed credit line that will be collateralized with the contract. It helps the contractor scale up.”
While the SBA has had similar programs in the past, they have been paperwork-intensive and have only been guaranteed to 50 percent of the credit line. Banks didn’t like either part of that equation.
The new CAPLines program “makes it more consistent with the way banks manage their revolving lines of credit internally - underwrite, document and monitor them - as well as making it easier for the borrower to access.”
Instead of traditional forms of collateral, the new program “is designed to be collateralized by your accounts receivable and your inventory,” explains Hulit. “As your accounts receivable and your inventory grow, your availability can grow.”
With Congress wrangling over deficit reduction and cutting the size and funding of government programs, Hulit is asked if this expanded lines of credit endeavor will require going to Congress for additional funding.
“What we’re trying to do in this administration is really look at what we have currently and deliver it better. We want to streamline our programs, we want to simplify them. We want to modify them within our own procedural ability and be targeted about the government resources we have at our disposal,” Hulit explains.
“The CAPLine program didn’t require any statutory approval or regulatory changes. It was taking an existing program and making it better. That’s what we’re trying to do for all of our programs. If our banks feel our programs are more user-friendly they’re more apt to deliver guaranteed loans to the small businesses that need them most.”
Hulit is asked if part of that user-friendliness includes language that’s easier for everyone to understand (related Corp! story at www.corpmagazine.com/features/cover-stories/itemid/1454/can-plain-writing-improve-your-bottom-line–or-ch). “We do have to have our standard operating procedures reviewed and edited by lawyers,” she laughs. “That is in its own right a challenge. But for the most part it’s not the borrowers who need to decipher our programs and terminology, it’s really the banks. We do a great job training our lenders. We’re doing our best!”
Those two programs — the working capital and the contract line — are, according to Hulit, “Our response to the fact that the economy is recovering and a lot of these businesses had their balance sheets banged up a fair bit over this past recession. They have viable businesses and their receivables are going to grow and they need to build inventory and we need to make sure they have the working capital to do that.”