Economic Perspectives with Hopeton Hay on KAZI 88.7 FM in Austin, TX

SBA Makes Changes to Jumpstart Small Business Loans

November 22, 2008

By Hopeton Hay

The U.S. Small Business Administration (SBA) announced two changes to its loan guaranty program this month to stimulate small business lending.

The first change will allow banks to use an alternate base interest rate, the London Interbank Offered Rate (LIBOR), to calculate the interest rate it charges customers. LIBOR typically is the cost of funds for banks.

SBA rules previously required banks to limit the interest rate they charged customers based on the prime interest rate. However, the decline in the historic spread between LIBOR and the prime interest rate had severely squeezed the profitability of SBA guaranteed loans.

Sandy Baruah

Sandy Baruah

“This change will help more small businesses obtain capital to grow their businesses and create new jobs,” said Sandy Baruah, Acting Adminstrator of the SBA. “By allowing both rates, SBA is making its programs more flexible, increasing opportunities to access capital and giving both lending partners and small business customers more options to meet their needs.”

The second change allows a new structure for assembling SBA loans into pools for sale in the secondary market. During normal economic times, small lenders sell their SBA loans to the secondary market freeing up capital for more loans. The financial turmoil, however, has drastically reduced the market for SBA loan pools. The SBA expects the enhanced flexibility in loan pool structures to positively affect profitability and liquidity in the secondary market for SBA guaranteed loans, especially with the current market conditions.

Eric Zarnikow

Eric Zarnikow

“The SBA moved quickly on these changes after consulting with small businesses, lending partners and other government agencies,” said Eric R. Zarnikow, SBA’s Associate Administrator for the Office of Capital Access. “We’re confident these solutions will help free up capital so lenders can continue to make SBA-backed loans.”

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