What’s the immediate impact and ripple effect?
The Immediate Impact
There will be no more loan closings under the SBA 7a program, except for those loans that have received an E Tran number for loan closing prior to December 21st.
This exception applies to a limited number of loans that were ready to fund. Under normal circumstances, E Tran numbers are available to preferred SBA lenders through a software application.
Many businesses do not qualify for loans under the lending policies of banks and other institutional lenders, but they do qualify for loans offered by that institution under an SBA program.
SBA loan guarantee programs provide small businesses access to capital at favorable rates and terms. The 7a program which includes the Advantage Loan Program is the largest SBA loan guarantee program.
In the fiscal year (October 1st to September 30th) 2018, the SBA 7a program guaranteed 60,353 small business loans for a total of $770,519,633. The loans were provided to both existing businesses and start-up enterprises.
These loans are underwritten, processed and serviced by 3rd party lenders. A major portion of each loan has a guarantee of repayment from the government in case of default on the part of the borrower.
Lenders will continue to process SBA loans but they will not be able to close and fund these loans until the government reopens.
Small businesses cannot afford the loss of a good customer, nor can they afford to lose a seasonal market. When normal funding channels are not available, these businesses are forced to seek more expensive payday loans to meet both contractual obligations and customers’ orders.
The Loan Underwriting Process
Lenders require a schedule of the use of loan proceeds as part of the underwriting process. Documentation to support the use of funds is provided to the lender as part of the loan approval process.
The supporting documents, pending contracts and agreement provide substantiation for the use of funds and the borrower’s readiness to close the loan.
The use of proceeds schedule under the 7a program can include the following: repayment or refinancing of existing debt, the purchase of real estate, and equipment, and other contractual agreements such as a lease, a general contractor’s bid, and purchase orders for inventory.
The lender does not require that these agreements be executed until the loan has been approved.
In addition, the prospective borrower has to provide proof of insurance coverage to meet SBA requirements. The insurance policies may require payment prior to closing.
Once all the conditions for loan closing have been met, the prospective borrower usually executes these agreements to make certain there are no delays in delivery of service to be provided or products to be delivered.
In many cases the borrower has to fund deposits on the contracts.
When there is a government shutdown and the SBA is unable to issue a loan guarantee via an E Tran number, the loans are not closed or funded. The borrower has met his obligations to the lender and incurred contractual obligations to third parties.
A delay in loan funding may require that he seek alternative capital resources such as the use of available credit lines or payday loans at high interest rates.
The Ripple Effect
Using credit cards to fund operating costs can be a costly and risky alternative if the government shutdown continues for more than a few weeks.
Overuse of credit cards will lower FICO scores and that will have an impact on the borrower’s ability to access additional capital at favorable rates.
Delays in purchasing inventory because of a delay in the loan funding can result in the loss of a season, the loss of customers, and a reduction in profits, even if the delay is for a short period of time.
Both late payment penalties and legal expenses may be incurred if the 7a loan funding includes repayment of existing business debt that has a maturity date that matches an intended loan closing date.
Additionally, the time that has to be allocated to addressing all these emergency issues frequently results in an economic loss to a business.