March 17, 2009
Authored by: Bryan Cave
On March 16, 2009, the Treasury announced the terms of new program, Unlocking Credit for Small Businesses, aimed at helping jump start credit markets for small business loans. The program includes the following significant provisions:
- The Treasury will purchase up to $15 billion in securities backed by Small Business Administration (SBA) loans;
- The SBA may guarantee up to 90% of Section 7(a) loans, which are loans to support the business operations of small businesses;
- The SBA will temporarily eliminate loan fees for certain Section 7(a) loans and 504 Program loans, which provide long-term financing to directly support economic development within a community;
- The largest Financial Stability Plan Assistance recipients must weekly report their SBA lending activities, and all financial institutions may have to monthly report their SBA lending activities; and
- The Treasury will issue guidance for the tax-related provisions, aimed at providing liquidity to small businesses and encouraging investments in small businesses.
Together, these provisions are aimed at increasing small business lending, which is extremely important in these flagging economic times because small businesses have generated approximately 70% of net new jobs annually over the past decade. These provisions should also provide a liquidity boost for community banks, credit unions, and small lenders, who together account for approximately 40% of all SBA-backed loans, by allowing these institutions to sell existing SBA loans and then to extend more credit to other borrowers.
Financial institutions should be more willing to lend to small businesses, knowing that the Treasury is a ready to purchase packaged loans on the secondary market. Moreover, because of the increased guarantee, other secondary-market participants should be more willing to purchase these SBA-backed securities. Finally, because the SBA is temporarily eliminating certain fees, more small businesses are likely to pursue SBA-backed loans. As an added benefit to small businesses that received SBA loans on or after February 17, 2009 but before the announcement of this program, the SBA will refund those fees that borrowers have already paid.
In addition to these changes, which provide direct economic benefits to all SBA-market participants (i.e. a carrot), the Treasury, by seeking weekly reporting on SBA lending from the 21 largest institutions receiving Financial Stability Plan Assistance and quarterly reporting from all institutions, is also applying subtle pressure to increase SBA lending (i.e., a stick). Certainly, these reporting requirements would provide timely information about small business lending, but these requirements would also, potentially, expose certain institutions, especially those that have received government assistance, to public ire if they failed to lend to small businesses in these troubling times.
Tax-related provisions under the new program include (1) guidance on the five-year carryback provision to increase tax refunds to small businesses; (2) deductions of up to $250,000 for qualified investments; (3) decreased payments for 2009 estimated tax burdens; (4) continued bonus depreciation deductions for certain purchases of property; and (5) exclusion of capital gains taxes for certain investments in small businesses.
In total, the Treasury’s and the SBA’s program includes specific benefits aimed at all players in the small-business market: the borrowers, the lenders, secondary-market purchasers, and the investors behind those small businesses.
Click here for the SBA’s Q & A on the program.
Click here to read Secretary Geithner’s remarks on the program.