SBA Loans – You Know Most Lenders Are not Funding, But Why?

SBA loans and in particular, SBA 7a loans are down substantially year to date, by 57% according to the Small Business Association. We all know the bad news, but what are the issues specifically? Frozen secondary market and little known fees for the lenders.

The main problem for SBA 7a loans currently, is that the commercial secondary market for these types of loans are completely frozen and has been for over 6 months. What this means is that investors do not want to buy this debt. Without investors buying loans of the secondary market, banks do not have the ability to "recycle" their capital. Most modern banks are not set up to hold onto to debt long term, like it was done in the past.

SBA Loans

Under a healthy market, banks are able to originate, fund and sell off their SBA loans for a substantial profit. Most importantly, with this system they not only make a profit but they get their capital back, so that they can go out and fund another loan. In addition, many banks have missed timed the markets and have a substantial amount of SBA loans stuck on their balance sheets, which have further slowed or stopped their lending.

One of the other major issues here, which is really not well known to the public, is that the fees for lenders, charged by the SBA, to the funding banks, are expensive. With premiums Dropping substantively for banks, the SBA fees have become that much more restrictive. Banks and lenders have asked and where hoping for a reduction with the Stimulus Package but did not get one. Due to this issue coupled with the additional paperwork for banks to work with the SBA many have simply taken out, as it is not being profitable enough to justify the work.

The solution to both of these issues could very well be what Obama already put in to action. With $ 50 billion being deployed at the end of March, for the government to buy commercial debt frozen on the secondary market, many experts believe that this is the best move available and that it should work. The analogy of the market being frozen is very fitting. With the bulk of the ice being broken (bought) the river should begin to flow once again.

Source by Jeff Rauth

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