The media is filled with stories about the different ways the Sequester is going to effect each and every one of us in our everyday lives. And whether you believe all of the doom and gloom or not about what the sequester might bring, sure enough some cuts are going to have an impact.
Unfortunately the Small Business Administration, who administers the SBA government guaranteed and assisted loan programs, is going to feel some of the effects of the sequester. That budget has seen a cut in funding for 2013, and because of that the SBA has had to lay off some employees and make other cuts. However, staffing and administrative cuts were not sufficient, and the total money available to guaranty loans originated under the various SBA loan programs has also been cut back.
What do these cuts mean? Well for one, none of the existing programs have seen major changes or been eliminated, which is good news. Although there may be some minor changes to the programs yet this year, those changes will all fall under typical annual changes to try and make the programs more effective and less burdensome, and will not directly relate to the sequester. However, with less total funds available to guaranty loans, it could very well mean some loans approved under the program this year might not get funded in 2013. Once the SBA uses up all of the funds they have available to guaranty loans in their 2013 budget, they won’t be able to guaranty any more loans until they get their funding for the next fiscal year.
If you look at historical trends, the SBA has not run out of guaranty money the last three years. However, the SBA has seen huge growth in the use of its programs over the past three years, with growth expected again in 2013 as the economy and banking industry continue to recover and more loans are made in general. With total available money to guaranty those loans falling in 2013, and possibly again in future years, it very well could create a situation where there is not sufficient money to fund all loan requests this year.
Ultimately, how could that effect you as a business owner? Well, if you are trying to fund a loan utilizing the SBA 504, SBA 7A, or other SBA loan programs, you better be sure to get it funded sooner than later in 2013. Although there is no guaranty they will run out of guaranty money, we have heard predications that if SBA lending continues to grow at the same rate in 2013 that it did in 2012, that the SBA could run out of funding in the early fourth quarter of 2013. Even if that were to happen, it does not mean an approved project is doomed. But if the SBA does run out of money, it does mean a project approved in the fourth quarter of 2013 may not be able to be funded until the SBA gets its new annual funding in 2014. Which could delay business expansion and job creation. In addition, if the money is to be used to fund the acquisition of real estate, it could create a problem for sellers because they may not want to wait until the SBA funding is back in place. And of course if a bunch of loans get pushed from fourth quarter 2013 into early 2014, that will negatively impact the money available to fund deals in 2014 as more will be utilized earlier in the year, with the impact being especially bad if the budgeted money for SBA loans does not increase in 2014.
This whole problem could get worse if the SBA 504 program brings back their refinance provision, which is currently being debated in Washington. Typically the SBA 504 loan program can only be used for new acquisitions, a substantial expansion of an existing business, or new construction for a primarily owner-occupied commercial property. But in 2011 and part of 2012 the SBA did allow the refinance of owner-occupied properties under that program. The refinance program was very successful and created substantial additional loan volume for the program, and if that refinance program is brought back in 2012, it will likely further eat up substantial funding available because with record low rates and high loan to values on many properties, the SBA 504 refinance program is an attractive alternative for business owners. Although overall bringing back this program would be good for business and the economy, it could negatively impact the funding available for other SBA loans.
There is certainly a lot worse news out in the market then less SBA guaranteed loan funds available for 2013. But still, losing any dedicated funding for commercial loans can be a real negative, not only for the small business owners that utilize the SBA programs to grow their businesses, but also to the economy as a whole because the SBA programs are a proven creator of small business jobs and profits.