SBA’s Lending Program Vital for Economic Recovery

The past year has seen no significant increase in loan disbursements among lending institutions. The good news is that the small business lending market is recording considerable progress, thanks to the legislation that extends the provisions of the American Recovery and Reinvestment Act.

The bill provides $730 million to the Small Business Administration (SBA) and includes $375 million to temporarily waive fees on 7(a) and 504 loans. This alone is a significant measure in a credit market that it is still reeling in the aftermath of the financial crisis.

The loans under the 7(a) lending program have had many takers. More than 16,000 loans were processed by the SBA in the second quarter. Previously, the government guaranteed up to 75% of the loan amount but the extended provisions increase the guarantee up to 90% on some loans. Government guaranteed loans reduce the lender’s liability, as in case of default, the government pays the portion guaranteed.

On the whole, the SBA has lent out $3.7 billion. It is expected that small business lending will benefit from a total of $1.8 billion in additional funding. The special provisions have met with a good response to the extent that the funds were exhausted by November 2009. An additional extension of $125 million ran out by the end of February. It is expected that $40 million more will be provided to further extend the program.

These loans provide significant relief to small businesses that are creating sustainable jobs. Jonathan Swain, a spokesperson for SBA said that the need of the hour is a long term program. Due to lack of funds, there has been a noticeable drop in the volume of loans approved by the SBA. The National Small Business Association and the Independent Community of Bankers of America are also in support of the proposal for funding till the end of the year.

The SBA lending programs may be a success but banks are still reluctant to approve loans for small businesses. Many businesses do not have adequate capital and meet most of their expenses out of their own pockets or by using credit cards. The strategy will be unsustainable in the long run.

Small businesses accounted for almost 65% of the new jobs created in the past few months and unless these businesses are given the financial support that they need, unemployment is likely to remain high.

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