The Daily Resource for Entrepreneurs

Criticism has swirled around the Small Business Administration in recent weeks amid reports of sharp declines in government-backed loans for entrepreneurs. Loan vol-umes under the agency’s flagship 7(a) loan program slumped 30 per-cent this fiscal year -- at a time when business owners are in dire need of cash. SBA officials blamed the drop on a host of factors: less demand from skittish borrowers, tightened lending standards and reduced cred-itworthiness.

But the decline has deepened as the secondary market for SBA loans -- where lenders sell the guaranteed portion of the loan to other institu-tions -- ground to a halt in October. The market is a crucial source of liquidity lenders need to make more small-business loans.

Under heavy pressure from law-makers, the SBA swiftly relaxed

its lending standards last month. The change allows lenders to peg SBA loans to the London Interbank Offered Rate -- a widely used inter-est rate, known as LIBOR, at which banks borrow funds from other banks -- and lets them pool the loans when they sell them on the secondary market. Now, the Trea-sury and the Federal Reserve plan to create a $200 billion lending facility aimed at unfreezing the secondary market for SBA loans.

So will the plan help credit-hungry small businesses? Inc.com asked Christopher Hurn, CEO of Mercantile Commercial Capital, an Orlando-based SBA lender and No. 1,683 on the Inc. 5000. His firm, which financ-es commercial real estate through the agency’s 504 loan program, has issued SBA loans in 33 states.

The SBA’s two main loan pro-grams have cut back their lend-

ing significantly lately. What’s going on?

The biggest SBA lenders have been the large national banks that we’re now reading about in the news. The easiest thing for them to do is cut back in all areas, which they’ve done -- including in their SBA divisions. It would be interesting to see when these large banks decide they want to get back into SBA lending. They will in a year or so, but they’re not there when the small-business com-munity needs them. They’re going to come back when it’s convenient for them. I think it’s abhorrent that they’re taking some of the federal assistance and they’re using it to fix their balance sheets and get their ratios back in line. They’re being encouraged to lend, but there’s no gun to their heads saying, ‘Look, you’ve got to put the money back on the street.’

can you get an sba Loan?

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BY Venuri Siriwardane

The Small Business Administration has come under fire for not lending more at a time when business owners need cash the most. We asked an Inc. 5000 SBA lender for his opinion about changes the agency is making to help small companies survive the recession.

Published December 2008

Critics say the federal govern-ment waited too long to act on behalf of struggling small busi-nesses. Do you agree?

We have waited too long. I’m still trying to figure out what of the $700 billion was ever carved out to help small businesses. I think they de-cided, ‘We’re just going to invest in banks and buy some of these toxic securities.’ So you’ve got politicians and the Fed and the Treasury all saying to the banking community, ‘You’ve got to put some money on the street. We’re doing all this to en-courage you to not be so fearful.’ At the same time, you’ve got banking regulators saying, ‘We’re looking at your ratios and they’re not correct. You need to fix your balance sheets.’ What is a banker supposed to do? If the regulators can put them out of business, chances are they’re going to do everything they can to comply with regulation first and foremost.

The Treasury and the Federal Re-serve recently announced a plan to unclog the secondary market for SBA loans. How effective do you think it will be?

I think it will be much more effec-tive than the SBA’s own changes. It’s great that you can now price the loans off of LIBOR. But this is an issue of access to capital, not an issue of the cost of capital. Right now, rates are at historical lows. But it doesn’t really matter if a business owner can’t get a line of credit in the first place. What the Fed and the Treasury have done is actually take some action. They’ve got the facil-ity now where they can start buying these loans, and that’s really what’s going to thaw out the market.

Has your firm been affected by the secondary market freeze?

We didn’t have any problem sell-ing loans in the secondary market until 45 days ago, and we are just slightly above what we had last year in terms of growth and revenue. I wouldn’t normally be happy about single-digit increases, but now I see numbers in the SBA world where people are down 90 percent. Busi-ness owners are either flocking to non-bank specialist lenders like us, or to community banks. We are the ones still lending. In the past, we may have competed with three or four banks on that SBA transaction. Now we have one bank that we compete against.

How can the SBA further improve its lending programs?

There’s been an overlap between the 7(a) and 504 programs for years that nobody in the industry wants to talk about. It’s because of the commercial loan officers, who are compensated based on the size of the assets they bring to the banks. Until the agency stops denying that there’s an overlap between the pro-grams, you’re going to have plenty of bankers who will claim they’re doing the right thing for their bor-rower, but they’re really looking out for their own interests. The agency has also been terrible at marketing itself to the small-business commu-nity. There are a lot of entrepreneurs out there who think the SBA is the lender of last resort. That’s unfor-tunate because in many cases, it’s easier to even get an SBA loan right now that it is to get a conventional bank loan.

What changes should President-Elect Barack Obama make to the SBA when he assumes office?

During the Clinton administration, the SBA administrator was a mem-ber of the cabinet. Unfortunately, that wasn’t the case during the Bush administration. The statistics don’t lie. Small businesses in America make up greater than 50 percent of the workforce in America, which means we need to give that commu-nity the support it deserves. The way to do that is to have direct access to the president. So go ahead and make it a cabinet-level post again.

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Christopher Hurn, President, CEO, Cofounder, Mercantile Commercial Capital

Contact Chris and Mercantile Commercial Capital for more information on how to get an SBA loan: 1-866-622-4504, or info@mercantilecc.com, or visit www.504Experts.com.