There’s been a lot of discussion in 2010 surrounding the role the small-business community plays in the current economy—specifically, how small businesses could be the key to buoying the sluggish economy.
White House officials have gone to great lengths to ensure that those small-business owners looking for funding are able to have a fair shot in accessing those funds—in fact, the U.S. Small Business Administration stimulus extension was again renewed. Of course, the hope is that out of the small-business owners who receive U.S. Small Business Administration loans, all will not only invest in their businesses but also hire more employees—which will hopefully make a dent in the unemployment rate.
Peter Downs, President of Business Lending at The Small Business Authority, recently sat down to share emerging news from the small-business sector and clarify how nonbank lenders factor into the mix.
Mr. Downs, would you clarify how the recent stimulus funds affect the overall U.S. Small Business Administration lending program?
Peter: The U.S. Small Business Administration program has been around for 50 years—it has always been funded. With the new stimulus funds, all that means is that there are additional funds earmarked for small-business lending in addition to what has existed in the past. The stimulus also guarantees 90 percent of the loan rather than 75 percent of the loan, as in years past. That 15 percent is crucial, because it’s covering a greater amount of the loan. If for some reason the borrower defaults, the U.S. Small Business Administration steps in and actually pays back the lender, thus minimizing the risk to the lender.
Let’s talk about how this plays out on the front lines. Would a small-business owner typically approach a nonbank lender like Newtek for funding?
Peter: In the past, I would have said that the answer was “no,” simply because small-business owners tend to utilize three different things to fund their businesses:
1. First, they use the equity in their home, because it’s cheap and easy for them to use and it’s something they own.
2. Next, they’d probably go to their local banks, where they had a deposit relationship, and ask for some kind of financing or line of credit against their business assets.
3. Lastly, they would probably consider credit card financing.
That was all in the past, though. Most people no longer have much equity in their homes—if they do, it’s very hard to get a loan that way, because credit criteria have changed significantly. Because banks’ balance sheets have been beaten up so badly by all of the problem loans they’ve serviced, they’re more focused on managing the current situation rather than offering new lending. Obviously, credit cards have gone by the wayside because they’re unsecure, and some of the changes Congress has made in how credit card companies can charge late fees have made it less profitable for banks and others to issue cards.
Essentially, the economy has wiped out most of the “old ways” of securing funding, so small-business owners have had a much tougher time accessing funds—which is where nonbank lenders enter the picture.
Why is a nonbank lender a good alternative?
Peter: Nonbank lenders, like The Small Business Authority, don’t have balance sheets laden with real estate loans that didn’t perform, don’t have weird investments on their books like large banks, and generally aren’t weighed down by complications. What’s more, we have access to the U.S. Small Business Administration program, which is being pushed forward aggressively as a viable solution for small-business owners. All of these factors make us a unique option for lending.
Be sure to read part two of this series, in which we discuss nonbank lending and its community bank partnerships.
In the meantime, we want to hear from those of you who have recently attempted to secure small-business funding. Were you successful? Also, have you considered nonbank lending as an option? Tell us about your experience.