Every corner we turn lately seems to bring more bad economic news. But it does have one positive aspect. More and more, our Congress, President Obama, and the everyday American citizen is putting their thinking cap squarely on and coming up with new ideas. New concepts are sparking in both quality and extent. So here’s an idea that is so obvious that one wonders why it has not been placed at the front of the parade: Why don’t we make more government backed SBA loans available?
In 1953 the SBA had a simple and brilliant idea. Loans were not flowing as readily to small businesses because of the conservative nature of banks which instead tended to honor the commitments of larger businesses. So the SBA set up a guarantee program whereby a borrower would pay a small fee upon closing and this would be used, like an insurance policy, to pay the bank if there was a default. It’s easy to discern their motive. It was to give the banks more incentive to make loans that were considered less conventional or risky. And it has worked quite well for decades.
The response to this might be: “Well so what, the SBA already has such programs and they have been doing so for years, even during the bad economic times. It has not really helped.” Not so fast. Why don’t we take this simple and successful model and expand it? Why shouldn’t we have more loan programs, with more creative terms, and more expensive marketing? Let’s create whole new program specially devised for our present economic times?
Talk to any small business lately and it’s only a matter of time when they discuss their high credit card payments that drains cash flow. In simple monetary terms, lines of credit and loans have been unavailable. But a business has to survive and even expand. For those that had good credit, staring them in the face was the availability of thousands of dollars of credit available on their credit cards. They had no choice but to charge and spike their card balances. It worked very well as long as the interest remained at a manageable rate. But then matters changed quickly when available credit was frozen and interest rates were unilaterally raised without further notice. Here is an actual example.
Mr. Jones was laid off from an environmental consulting firm and started his own business. At first he operated out of his home and had a low budget. He provided consulting services to medium-sized businesses, primarily measures to save on their energy bills. But he was almost too good, and demand started to increase. He was offered larger and larger contracts that required him to expand and hire more independent contractors. He always paid his bills on time and had good credit, with a credit card company all too happy to offer him a platinum card with a limit of $50,000. Before we knew it, he had outfitted his new office with computers, equipment, signage, advertising–you name it and it was placed on his card. The interest rate was 7.99% and he was able to handle the payments when it reached a balance of $35,000.
But one day he received a notice in the mail that changed everything. Without any change in his credits score or payment history, the card company immediately raised his interest rate to 26%, with the amorphous statement it was due to “current economic conditions”. You guessed it. His payments went through the roof. He continues to pay on time, but he is in the hole because most of the interest is going to principal and he can’t keep up.
Why don’t we come up with a SBA small business loan program as follows:
• Small business loans from $5,000 to $50,000 to be used exclusively for the purpose of paying down debt on credit cards having been used for business purposes. These SBA loans will be guaranteed for 90% so was to give incentive to banks to make the loans.
• As with other SBA loans, this will be made to people that have good credit and have not significantly defaulted on their credit card payments.
• Proof will be made, under penalty of perjury, that the loan is used to pay off only business debts and not personal. It would be up to lenders to come up with a reasonable verification process. For goodness sakes, all you have to do is go to your file cabinet and pull out your monthly statements. Using a highlighter, you can easily calculate how much of your balance was related to business. For the more adventurous, this can even be put on a spreadsheet. The point is, it could easily be confirmed.
• The program would be totally optional to the credit card company.
• If the credit card company consented, any portion of the balanced could be paid off at the rate of, for example, 80%. Since a lot of the balance can be attributed to high interest rates, this would give some relief to the cardholder. Another option. The interest would be rolled back to the interest rate when the card was first issued, plus a cost of living increase. The cardholder would have the option of retiring the principal and interest at that lower rate in one large payment. The card company would have the right to charge its current or higher interest for future purchases. In the meantime, the card company would not have the right to cancel or reduce any existing credit limits then in existence.
Why would a credit card company not welcome this? Have you read the data lately? Surveys indicate 37% of banks have increased their credit card rates, compared to 24% in April and 10% in January. Advanta experienced an 83% decrease in earnings in the second quarter, because of massive charge-offs. Capital One’s profits have plummeted to 40% and American Express has been hit with a 38% decrease. Bank of America lost 2.7 billion in credit card losses, 31% more than last year. The choice is suffer more losses and see your cash flow dwindle because people are hardly able to make payments on the interest or pay down principal.
In the meantime there is something that can be used to pay down your credit card debt. 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. So why don’t we expand that one?
This is the time to act decisively and creatively. The old ways of doing business must be dismantled for the new. As a spin-off result, it will reinvigorate the over 27 million small businesses in this country which deserve a break.