REPORT FROM THE U.S.—Small business lending under U.S. government-backed Small Business Administration, 504 and EB5 loan programs grounded to an immediate halt this month during the shutdown in Washington, D.C., putting the status of all open applications as of 30 September in temporary limbo until business resumes later this week. But the waiting isn’t over just yet.
Now that the government is back up and running—with President Obama and congressional leaders reaching bipartisan agreement Thursday to reopen the government—borrowers will likely experience further delays as systems play catch-up. During the shutdown, loans awaiting approval have been piling up in various queues, which is where they remain.
“We’ve heard rumors and guesses that it will take three days for every one day that the government was closed for the SBA to catch back up on processing,” said Mike Rozman, co-president and chief strategy officer of BoeFly, an online marketplace that connects lenders and borrowers. “When you start stretching it out, if I didn’t get in queue until this week, I might not get my loan approved by the SBA until a number of weeks from now. So there is a level of anxiety both on the business borrowers’ side and the lender side.”
Sources indicated there was a push by many SBA 7(a) hotel lenders to close loans by the end of September, sensing the shutdown and its impact. However, any loan that didn’t receive final SBA approval by that deadline now sits in the queue. Fortunately, the approval, and the SBA’s involvement, comes at the final stage, so in the meantime lenders are still trying to do as much as they can to keep the process moving.
“Any new requests that were early in the process or midway through the process prior to or during the shutdown, we’re continuing to work on those with the banks, and we’ll try to get them up to that final step, before they have to contact SBA,” said John T. Monroe III, founder and managing member of mortgage broker Windward Financial. “There’ll probably be some delay getting that queue cleared out. My guess would be, based on the times that they’ve had to accumulate queues for various reasons, that it will probably clear out pretty quickly, but I don’t know how long.”
Impact on business
Meanwhile, as the chips fall in Washington, business owners are shouldering the impact. Observers are tempered in their reactions to the situation—in many cases, a brief delay in the process will ultimately be only a minor inconvenience—but there is cause for heartburn. These loans are the backbone of many small businesses, particularly within the hotel sector.
“One-hundred million dollars a day is not being funded, and that is a problem, because those loans are for acquisition of property and equipment, and expansion. All of those were put on hold, so that’s an issue,” said Bob Coleman, editor of the Coleman Report, which tracks the SBA lending industry. “Hospitality is very significant in SBA 7(a) and extremely significant for 504. I believe it’s the No. 1 industry code for 504 lending.”
So the longer hoteliers have to wait, the longer their new projects aren’t getting done.
“We’re going to start seeing some unintended consequences from the shutdown,” Rozman said. “Things like if I’m a business owner and I was expecting to have my loan to close by this point in time, it’s going to impact my ability to start locking in contracts with my construction team, or other suppliers that I need to engage with, including on purchase and sale transactions.”
There’s also a secondary concern specific to 504 lending, which is funded by the issuance of U.S. government-backed bonds. Although the October debenture is secure, it’s unclear at this time whether there will be a November issuance.
“It’s questionable whether the November bond will be issued; it’s still not resolved yet,” Rozman said. “Based upon the limited number of loans that will have funds once the government opens back up, it raises the question of whether they’re going to be able to issue a bond, and that’s going to have an implication for business owners of the 504 program, most likely on the cost of borrowing. So we’re all going to be keeping our eyes very closely on what implications it will have on the 504 bond sale and rates, which is going to be a direct implication on small business owners.”
Other options
Among those profiting from this month’s standoff are the alternative lenders, according to sources. Rozman said among BoeFly’s clientele, those capital providers still open for business are eager to court customers while the SBA is shuttered.
“Some of the alternative lenders are really trying to use this as an opportunity to remind the market and business owners in particular that they’re not dependent upon Washington in any way in order to meet borrower demand,” Rozman said. “Some of the folks we’ve engaged with recently on the alternative lending side, for instance our merchant cash advance folks, they’re entirely independent of government guarantees. They’ve been stressing to business owners that the government shutdown hasn’t affected them at all, and they’re ready to issue financing products for business owners today.”
Other impacts of the shutdown are more fundamental, but no less important. For example, borrowers may now need to prepare new financial statements for delayed loans, since the 90-day coverage period of the application has now changed.
“SBA requires updated financial statements, and you need one within 90 days,” Coleman explained. “So you could’ve had one for 30 June that was perfectly fine at the end of September; now you have to go and make sure that you have a financial statement for July or August for the bank. It adds more money and complexity, and it’s really a shame, because it’s self-inflicted.”
Now that the government shutdown has ended, the immediate danger has passed, but observers agree the closure was certainly not a welcome stressor on a still-recovering economy. Rozman said lately BoeFly has seen loan volumes, especially in the franchise market, return to long-time averages, which is a testament to financial recovery. Now though, he’s expecting those numbers to plummet again, and hopes we’ve seen the last of the political drama … at least for a while.
“Business owners should not see this as catastrophic. The SBA’s not closing, and in fact we’re talking about weeks, not years, to get people back up and running,” Rozman said. “But the fact is, the economic recovery has been challenging, and we don’t need another shot to stand in our way. It’s important for business owners to keep perspective, but for our policymakers and elected officials, this is another bump in the road that we don’t need today.”