To spur job creation, boost loans for small businesses

(Regarding article, “White House calls for jobs bill as it touts effects of stimulus on employment,” Jan. 13.) The administration is correctly focusing on a jobs bill, but to spur job creation, the administration and Congress may want to fully address the lack of available first-lien cash-flow loans to small businesses. Companies with up to $10 million in annual cash flow are having difficulty getting such loans.

In this regard, the administration and Congress should seriously consider temporarily expanding the Small Business Administration’s company and loan size standards for SBA-guaranteed loans.

New legislation could permit the SBA to partially guarantee first-lien cash-flow loans to companies that do not fit SBA size standards and with less than $10 million of annual cash flow.

Also, new legislation could permit these companies, as well as businesses that currently fit SBA’s size standards, to apply for SBA-guaranteed senior cash flow loans of up to $20 million. The SBA’s current maximum permitted loan amount is only $2 million in its primary 7(a) lending program.

This temporary expansion in the agency’s size standards could be two to three years in duration, and would help the agency achieve its mission of helping Americans build and grow businesses. The SBA already has thousands of  lending partners that could begin making such SBA-guaranteed loans almost immediately.

Furthermore, the maximum percent of a loan the SBA guarantees against loss could be adjusted downward materially because the partial guarantee could support loans to businesses with relatively larger and more stable cash flows than those of companies whose borrowings the SBA currently guarantees.

The probability that taxpayers lose money on these partial guarantees is very low. First, the SBA would receive an upfront fee plus an annual ongoing service fee based on the outstanding balance of the guaranteed portion of each loan (per current agency guidelines). Second, each loan would be first in line to be repaid in the event a company defaults. Third, when each loan is made, the loan amount would be no more than 40 percent of an enterprise’s value. Fourth, because the SBA guarantee only partially covers a lender’s losses, that lender would be prompted to carefully underwrite and monitor each loan.

Using reasonable assumptions, the temporary increase in the loan guarantee program would be self-funding, with no likely cost to taxpayers because cumulative fee revenues would be expected to cover any potential losses.

Because these larger loans would have substantial margins of safety, the SBA would not need to require persons who own 20 percent or more of a business to post personal guarantees, as it currently requires.

Finally, this SBA guarantee would extend to eligible small business loans in excess of small-business loan targets to which large banks have already publicly committed for 2010.

Larchmont, N.Y.