Small Business Owners Suffer as Deteriorating Secondary Market Hits SBA Lenders

Small Business Owners need to “Think Outside the Bank”

Banks are making fewer and fewer SBA Loans every day. SBA loan volume for August and September fell more than 50% from a year earlier and is on pace to decline in October, as well. American Banker, Pullback in Secondary Market Hits SBA Lenders (October 30, 2008). But this time, banks are not the culprits, but rather the victims of the deteriorating secondary market for government small business loans.

Banks can’t “resell” SBA loans for a profit
Some banks hold and service the SBA loans they make, but the majority of banks package the loans and sell them to investors in the secondary market. The problem is the difference or spread between the cost of the investors’ funds and the interest rate paid on SBA loans. Since SBA loans are backed by the federal government, the interest rates are tied to the Prime Rate and lower than rates on non government backed small business loans. The money investors borrow to buy SBA loans is typically tied to the London Interbank Rate or LIBOR. After the Fed Reserve’s latest rate cut, LIBOR was around 3.5% and the Prime Rate fell to 4%.

When these two key rates are this close, there is just not enough margin or profit to entice a sufficient number of buyers into the market. Likewise, the profit margin for banks seeking to sell these government backed small business loans in the secondary market – if they can find buyers – is insufficient to entice them to make SBA Loans. For small businesses this means far fewer SBA loans are available.

According to James Hughes, President and CEO of Unity Bancorp, “There’s virtually no market left for SBA loans.” Unity, which aggressively expanded its SBA loan program a year ago, recently shut down 8 SBA loan offices in 7 states and laid off 10 of its 12 SBA lenders. Pullback in Secondary Market Hits SBA Lenders (October 30, 2008).

Small Business Owners need to “Think Outside the Bank”
With a vital source of small business financing becoming increasingly unavailable to small business owners, where can a typical small business go for expansion, inventory, or even working capital loans? One potential solution – “Think Outside the Bank.” More and more small business owners are turning to alternative lending institutions for their business financing needs.

Alternative lending institutions are typically private, licensed lenders that don’t take deposits, but do make business loans. These alternative lending institutions may focus on a few industries that they know very well. This allows them to tailor an underwriting model specifically for an industry or set of industries that can be more flexible than a typical banks’ underwriting model.

One such alternative lending institution is Advance Restaurant Finance, LLC (ARF). ARF has been loaning money to small businesses for almost a decade. It has developed expertise in the hospitality industry and routinely makes business loans from $5,000 to $1,000,000 to restaurants, bars, hotels, and night clubs. ARF’s extensive experience in the hospitality industry allows it to make loans to businesses that banks won’t.

With traditional sources of small business financing drying up, a smart business operator should “think outside the bank” and consider establishing a relationship with an alternative lending institution. It never hurts to have options.

© 2008 Advance Restaurant Finance, all rights reserved