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Small Business Loan Update – Stimulus Bill Helps Bailout Businesses If They Cannot Pay Loans

As we continue to sift dutifully through the over 1,000 pages of the stimulus bill (American Recovery and Reinvestment Act of 2009), there is one provision that is not getting much attention, but could be very helpful to small businesses. If you are a small business and have received an SBA loan from your local banker, but are having trouble making payments, you can get a “stabilization loan”. That’s right; finally some bailout money goes into the hands of the small business owner, instead of going down the proverbial deep hole of the stock market or large banks. But don’t get too excited. It is limited to very specific instances and is not available for vast majority of business owners.

There are some news articles that boldly claim the SBA will now provide relief if you have an existing business loan and are having trouble making the payments. This is not a true statement and needs to be clarified. As seen in more detail in this article, this is wrong because it applies to troubled loans made in the future, not existing ones.

Here is how it works. Assume you were one of the lucky few that find a bank to make a SBA loan. You proceed on your merry way but run into tough economic times and find it hard to repay. Remember these are not conventional loans but loans from an SBA licensed lender that are guaranteed for default by the U.S. government through the SBA (depending upon the loan, between 50% and 90%). Under the new stimulus bill, the SBA might come to your rescue. You will be able to get a new loan which will pay-off the existing balance on extremely favorable terms, buying more time to revitalize your business and get back in the saddle. Sound too good to be true? Well, you be the judge. Here are some of the features:

1. Does not apply to SBA loans taken out before the stimulus bill. As to non-SBA loans, they can be before or after the bill’s enactment.

2. Does it apply to SBA guaranteed loans or non-SBA conventional loans as well? We don’t know for sure. This statute simply says it applies to a “small business concern that meets the eligibility standards and section 7(a) of the Small Business Act” (Section 506 (c) of the new Act). That contains pages and pages of requirements which could apply to both types of loans. Based on some of the preliminary reports from the SBA, it appears it applies to both SBA and non-SBA loans.

3. These monies are subject to availability in the funding of Congress. Some think the way we are going with our Federal bailout, we are going be out of money before the economy we are trying to save.

4. You don’t get these monies unless you are a viable business. Boy, you can drive a truck through that phrase. Our friends at the SBA will determine if you are “viable” (imagine how inferior you will be when you have to tell your friends your business was determined by the Federal government to be “non-viable” and on life support).

5. You have to be suffering “immediate financial hardship”. So much for holding out making payments because you’d rather use the money for other expansion needs. How many months you have to be delinquent, or how close your foot is to the banana peel of complete business failure, is anyone’s guess.

6. It is not certain, and commentators disagree, as to whether the Federal government through the SBA will make the loan from taxpayers’ dollars or by private SBA licensed banks. In my opinion it is the latter. It carries a 100% SBA guarantee and I would make no sense if the government itself was making the loan.

7. The loan cannot exceed $35,000. Presumably the new loan will be “taking out” or refinancing the entire balance on the old one. So if you had a $100,000 loan that you have been paying on time for several years but now have a balance of $35,000 and are in trouble, boy do we have a program for you. Or you might have a smaller $15,000 loan and after a short time need help. The law does not say you have to wait any particular period of time so I guess you could be in default after the first couple of months.

8. You can use it to make up no more than six months of monthly delinquencies.

9. The loan will be for a maximum term of five years.

10. The borrower will pay absolutely no interest for the duration of the loan. Interest can be charged, but it will be subsidized by the Federal government.

11. Here’s the great part. If you get one of these loans, you don’t have to make any payments for the first year.

12. There are absolutely no upfront fees allowed. Getting such a loan is 100% free (of course you have to pay principal and interest after the one year moratorium).

13. The SBA will decide whether or not collateral is required. In other words, if you have to put liens on your property or residence. My guess is they will lax as to this requirement.

14. You can get these loans until September 30, 2010.

15. Because this is emergency legislation, within 15 days after signing the bill, the SBA has to come up with regulations.

Here is a summary of the actual legislative language if you are having trouble getting to sleep:

SEC. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- Subject to the availability of appropriations, the Administrator of the Small Business Administration shall carry out a program to provide loans on a deferred basis to viable (as such term is determined pursuant to regulation by the Administrator of the Small Business Administration) small business concerns that have a qualifying small business loan and are experiencing immediate financial hardship.

(b) ELIGIBLE BORROWER- A small business concern as defined under section 3 of the Small Business Act (15 U.S.C. 632).

(c) QUALIFYING SMALL BUSINESS LOAN- A loan made to a small business concern that meets the eligibility standards in section 7(a) of the Small Business Act (15 U.S.C. 636(a)) but shall not include loans guarantees (or loan guarantee commitments made) by the Administrator prior to the date of enactment of this Act.

(d) LOAN SIZE- Loans guaranteed under this section may not exceed $35,000.

(e) PURPOSE- Loans guaranteed under this program shall be used to make periodic payment of principal and interest, either in full or in part, on an existing qualifying small business loan for a period of time not to exceed 6 months.

(f) LOAN TERMS- Loans made under this section shall:

(1) carry a 100 percent guaranty; and

(2) have interest fully subsidized for the period of repayment.

(g) REPAYMENT- Repayment for loans made under this section shall–

(1) be amortized over a period of time not to exceed 5 years; and

(2) not begin until 12 months after the final disbursement of funds is made.

(h) COLLATERAL- The Administrator of the Small Business Administration may accept any available collateral, including subordinated liens, to secure loans made under this section.

(i) FEES- The Administrator of the Small Business Administration is prohibited from charging any processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, and other fees that could be charged to a loan applicant for loans under this section.

(j) SUNSET- The Administrator of the Small Business Administration shall not issue loan guarantees under this section after September 30, 2010.

(k) EMERGENCY RULEMAKING AUTHORITY- The Administrator of the Small Business Administration shall issue regulations under this section within 15 days after the date of enactment of this section. The notice requirements of section 553(b) of title 5, United States Code shall not apply to the promulgation of such regulations.

The real question is whether a private bank will loan under this program. Unfortunately, few will do so because the statute very clearly states that no fees whatsoever can be charged, and how can a bank make any money if they loan under those circumstances. Sure, they might make money in the secondary market, but that is dried up, so they basically are asked to make a loan out of the goodness of their heart. On a other hand, it carries a first ever 100% government guarantee so the bank’s know they will be receiving interest and will have no possibility of losing a single dime. Maybe this will work after all.

But there is something else that would be of interest to a bank. In a way, this is a form of Federal bailout going directly to small community banks. They have on their books loans that are in default and they could easily jump at the chance of being able to bail them out with this program. Especially if they had not been the recipients of the first TARP monies. Contrary to public sentiment, most of them did not receive any money. But again, this might not apply to that community bank. Since they typically package and sell their loans within three to six months, it probably wouldn’t even be in default at that point. It would be in the hands of the secondary market investor.

So is this good or bad for small businesses? Frankly, it’s good to see that some bailout money is working its way toward small businesses, but most of them would rather have a loan in the first place, as opposed help when in default. Unfortunately, this will have a limited application.

Wouldn’t it be better if we simply expanded our small business programs so more businesses could get loans? How about the SBA creating a secondary market for small business loans? I have a novel idea: for the moment forget about defaults, and concentrate on making business loans available to start-ups or existing businesses wanting to expand.

How about having a program that can pay off high interest credit card balances? There is hardly a business out there that has not been financing themselves lately through credit cards, simply because banks are not making loans. It is not unusual for people to have $50,000 plus on their credit cards, just to stay afloat. Talk about saving high interest. You can imagine how much cash flow this would give a small business.

We should applaud Congress for doing their best under short notice to come up with this plan. Sure this is a form of welcome bailout for small businesses, but I believe it misses the mark as to the majority of the 27 million business owners that are simply looking for a loan they can repay, as opposed to a handout.

Tax Tips for Freelance Writers: How to Lower Your Bill – 5 Things You Probably Didn’t Know

April 15th, the deadline for filing taxes for Americans, is almost here. If you’re a freelance writer — especially if you do your own taxes like I do — it’s critical that you get all the deductions you can to lower your tax bill. Why? Because running an online business can be very low cost, which is one of the reasons many are so attracted to the profession. If you have a computer and an internet connection, you’re pretty much ready to go.

So, following are five things you probably didn’t know that can help you lower your tax bill — making the difference between owing (possibly a lot) and getting a smidgen of a refund.

1. PayPal Fees: Do you deduct these? Almost very time you receive a payment, PayPal deducts fees, which are mostly 2.9% + $.30 per transaction.

For international sales, the PayPal fee is 3.9%, plus a fixed fee based on currency received. FYI, PayPal’s fees can be less if you sell more.

Visit PayPal to learn more about their transaction fees, and don’t forget to add this column to your expenses sheet moving forward, OK?

2. Banking Fees: For example, let’s say you’re a travel writer and you go away and use an ATM that charges you fees for withdrawals. This is a legitimate, deductible expense — because you’re on assignment.

3. Recurring Fees: For example, I publish ebooks. So I use an ebook cover-making site to help me with the designs. The monthly fee for this site is $9, which comes out of my PayPal account every month. I may go for three or four months without using the site (because I also outsource some of my ebook covers), then two or three where I use it all the time.

My point? It’s easy to forget these expenses and if you have two, three or four accounts like this (eg, magazine subscriptions, software subscription sites, paid newsletter subscriptions, etc.), it can really add up to $400, $500 or more per year — that you could be deducting as legitimate expenses.

4. E-File: If you’re in danger of missing the deadline (which could cost you penalties and interest if you owe), consider e-filing your taxes. Why? Because returns filed in this manner tend to be processed faster.

5. Don’t File & Save Money! Did you know that if you are owed money my by the IRS (ie, are expecting a refund), that there’s no penalty for filling late? Well, it’s true! According to the CNN article, Owed a refund? There’s no penalty for filling late:

If you’re owed a refund and you don’t file your taxes by Tuesday, you won’t get hit with a penalty. This has always been the case, but many people don’t realize it. The IRS is chomping at the bit to get its tax revenue. It’s less concerned about doling out refunds to people who haven’t claimed them yet.

So if you have a deadline you’re trying to meet (where you make money), and don’t have time to file taxes (which costs you time), by all means — meet that deadline. If you’re owed money, the IRS is not going to penalize you if you file your taxes late (wish this applied to me!).

Happy filing, and if you’re going to file late and owe, here’s a great tax calculator for estimating what you should send in.

Unsecured Small Business Loans – Good News – Stimulus Bill Allows SBA 90 Percent Guarantee For Loans

Anyone remotely involved with small businesses, whether as a consultant, lender, supplier, leasing specialist, trade association, or simply as a consumer who is tired of driving by sections of town and wondering why your favorite business unceremoniously threw in the towel, would very much like to hear some good news. Not to mention the small business owner itself. After all, there are 27 million small businesses that deserve to be thriving in this nation, but too often were ignored by the Bush administration. Classically non-complainers by nature, they just want a scrap of hope thrown their way. And I’m not talking about wide-eyed idealists looking for handouts-in all due respect to Emily Dickinson, they’re not looking for the”thing with feathers that perches in the soul”. Just give us a few bucks and we will run with it. This is a continuing article (20 in all) on the subject: Help. Is anyone out there loaning to small businesses anymore?

Fortunately there is a loan program out there and SBA lenders are actually making loans currently: the Community Express Loan Program. This gives unsecured small business loans between $5,000 and $50,000 with very little paperwork, answers typically in two days, interest rates presently at 7.75%, funding and two weeks, and monies wired directly to your business account. There are still lenders participating in this program, although Congress has failed to make the program permanent and still has a 10% cap on the number of loans.

Enter the Obama stimulus bill. Let us look how it affects this program and small business lending as a whole.

If you have tried to wade through the 1,100 or so pages of the new stimulus bill (American Recovery and Reinvestment Act of 2009), you know its like chipping through granite. But let me pull out a little gem. It now allows the U.S. Small Business Administration (SBA to you) to guarantee up to 90% of loans made by private lenders under their program. Let me explain. This is great for Community Express.

When the Small Business Act was enacted in 1958, it had a very simple mission. Find a way to get loans to small businesses that couldn’t get them through traditional channels. It did this in an ingenious way. They knew banks where reluctant to loan to small businesses, especially startups, because of fear of failure. So the SBA collected a fee on each loan and used this as a fund to pay banks if there was a default. Bingo, there was invented the SBA guarantee fee. It doesn’t take a degree in rocket science from MIT and an MBA from Harvard to know this gives incentives to the banks to make more loans.

SBA loan programs have guarantees from 50% to 85%. Specifically, the SBA currently has an 85% guarantee on loans up to $150,000 and up to 75% on loans above $150,000. On the other hand, there are some programs that only go as high as 50%, including the Express Loan program (for those types of loans the new guarantee will not change). With the new stimulus bill, the SBA has the right to increase these fees to 90%.

Think about this for a moment. Simple math tells us more guarantee, the greater the likelihood of the bank making the loan. For goodness sakes, 90% is tapping on the door of a 100% guarantee! Also note the guaranteed portion is typically sold on the secondary market (which has recently shut down to almost nothing) so there is more chance for loans to be sold and more money to go back into the coffers of the banks for further lending.

Notice I said the SBA has the right to increase it to 90%. It can pick which program. And it has not occurred yet. But if I was a betting person, I would say they would be seriously looking at most of the programs because everyone is scraping for ideas to revive the economy.

For those addicted to primary source documents, this is what the new statute, in relevant part (my attorney wanted me to add that) says:

SEC. 502. ECONOMIC STIMULUS LENDING PROGRAM FOR SMALL BUSINESSES. (a) PURPOSE- The purpose of this section is to permit the Small Business Administration to guarantee up to 90 percent of qualifying small business loans made by eligible lenders.

(b) DEFINITIONS- For purposes of this section:

(1) The term ‘Administrator’ means the Administrator of the Small Business Administration.

(2) The term ‘qualifying small business loan’ means any loan to a small business concern pursuant to section 7(a) of the Small Business Act (15 U.S.C. 636) or title V of the Small Business Investment Act of 1958 (15 U.S.C. 695 and following) except for such loans made under section 7(a)(31).

There is also a sunset provision under Subparagraph (f) that the guarantees are only good for one year after enactment of the bill, unless extended by Congress.

So what does it do for me now as a small business owner? Well now the not so good news. I predict the SBA will be increasing many of its programs to 90%. But to get the banks in the lending mood again, there has to be a secondary market. There is also new legislation on that, which we will discuss in another article. But once we have a secondary market, I predict that they banks will not only loan, but do so in a big way. For three reasons:

First, history tells us when there is economic inactivity due primarily to depressed conditions, when the cycle changes for the better, like a sling shot affect, it changes dramatically. Remember when people were unable to refinance or purchase their homes because of tight markets and high interest rates? The rates went down and many jumped at the chance to refinance, improve their homes, and purchase (some say too precipitously) with abundance. Although this is an overstatement and also depends upon other factors such as employment, standards of living, etc., the analogy holds that when things loosen up, there will be a substantial number of business loans.

Secondly, banks are in large part in the business of making loans and they have not been doing so for some time. They will be anxious to make profits again.

Lastly, simple economics tells us when there is a vacuum in the market; capital will rush in and take advantage of that open market and initial lack of competition. Large banks are not making business loans so small community banks are starting to rush in to take over the arena. Give them a secondary market and they will explode.

So for the small business owner, I think this news of 90 % guarantees is favorable. Why did it take them so long?