With the passage and signing into law of the Small Business Jobs Bill, it seemed an appropriate time to get back with SBA Loan broker Craig G. Francis. In this email interview I asked Craig for his thoughts on the various parts of the bill and how they might affect the country’s economy.
David Kamatoy: We have been waiting for passage of the Small Business Jobs Bill for some time now. What do you think the real reasons behind the holdup were?
Craig G. Francis: The real reason for the delay in passing the bill was that the Republicans did not want to give Barak Obama a win for business that he could crow about. Until the Democrats got the one filibuster proof vote from Sen Voinovich, they could not ram it through. Chalk it up to politics as usual and the $3 trillion dollar agenda of progressive bills that had to come first. Businesses are an afterthought. In general, business owners won’t vote for the Democrats.
David Kamatoy: Now that this Bill has been signed into law, how long do you think it will be before we see real results?
Craig G. Francis: Real results started taking place 3 months before the bill was passed as 7(a) and 504 borrowers got into the reduced fee queue to get some of the stimulus money. From what I heard, the stimulus money started to be made available this week. How large an effect it will have can’t be measured precisely, but there were probably tens of thousands of jobs to be created that were hanging in limbo. SBA lending is all about creating jobs.
SBA lending is all about creating jobs.
David Kamatoy: What do you think will be the most beneficial portion of the Bill? What element of this Bill will have the strongest positive effect on the economy?
Craig G. Francis: If we can quantify the effect in real time, the best we can expect is that business owners will see this bill passage as a sign that the government supports the expansion of businesses. Entrepreneurs are eternal optimists; that is their nature. But encouraging signs from any quarter can give the businessman or woman the needed boost in economic confidence to get started and moving again.
The most beneficial aspect of the bill is the reduction in SBA fees. Just the loan costs alone could pay for one employee.
The other important benefit is the 90% guaranty, a level of SBA backing that may get some banks off the fence. If their risk window is 10% of a loan versus 25%, or $100,000 versus $250,000 on a $1,000,000 loan, that could allow some of the banks with strained capital bases to make loans. Besides which, the premium on the 7(a) loan is about 10%, so the income from that premium would nearly cover the risk window. Making SBA loans may allow the bank to provide capital without the heavy hand of the federal regulators questioning their loan portfolio or motives in making loans to the riskier small business field.
David Kamatoy: Opponents have warned that this Bill is “TARP Junior” – how accurate do you think that assessment is?
Craig G. Francis: The “TARP Junior” label applies to the government funding of a secondary market for the 504 loans. Yes, there will be some oversight and control involved in that, but to a lesser degree than the first round of TARP. If the bank decides making a pact with the devil is worth it, they will sign on - or not - as the case might be.
David Kamatoy: There have been suggestions that banks may not be willing to tap into the $30 billion fund because they are concerned what the long-term ramifications would be. Could you explain just what these banks are worried about?
Craig G. Francis: The long-term ramifications may be further control of the bank, dividends to be paid to the government, and potential management oversight by the government for those who take these funds. It is a time to be cautious in these matters as the long reach of the government and its intentions for good or ill are to be carefully scrutinized. Think about the camel and its nose in your tent.
David Kamatoy: Do you think that there is really a market for the $30 billion in funds that the Bill provides, or are businesses more concerned with survival than with expansion right now?
Craig G. Francis: There is a large market for the $30,000,000,000 which can be leveraged 10 to 1. Smaller banks who could not portfolio the 504 first-trust deed, or who dealt with a client whose loan could not be sold to the presently-established secondary market, may find this arrangement very attractive. Bear in mind, that despite this economic rough patch, banks still have to lend. And compete. If their fellow bankers jump on board by using these funds and beat their lending neighbors, this could create a rush to the funds that would help the business owners, if for no more reason than the community bank can offload a risky loan to the secondary market, gain an account relationship, and garner a market sale premium of as much as 6 percent. Good money if you can get it. Think of it as a financial cattle call for lenders. Some eat well and some get trampled. And even more get turned into hamburger.
David Kamatoy: What is it about the $30 billion lending portion that concerns bankers?
Craig G. Francis: The bankers are concerned about the government control and oversight for the $30,000,000,000, particularly if these funds provide an avenue to taking some small amount of control over the bank, its lending preferences, and the geographical priorities of the bank. In other words, who they lend to and where they lend.
David Kamatoy: How will the increased limits on SBA loans benefit the businesses community and the economy?
Craig G. Francis: To some extent, $30,000,000 seems like a drop in the bucket. But in the past the SBA provided between 30-50% of all long-term financing to the small business community and did so with low risk to the banks and government. Small business owners and entrepreneurs can stretch a buck farther than Ebenezer Scrooge.
David Kamatoy: There have been suggestions that banks might begin making risky loans with this $30 billion pool of money. Do you think these concerns are valid?
Craig G. Francis: Banks will make 'riskier' loans to their clients if the risk is reduced to near zero. See the subprime debacle as an example. This small pot of money won't create a bubble and businesses will use the money wisely, but we will have some increased risk-taking on the part of the banks.
Of course, when you consider the fact that the banks have been taking zero risk lately when lending to the small business community because they are making zero loans to that community, all the while trading free fed money for treasuries and making huge spreads, I think that the banks will see SBA as a more profitable loan deal. They can make much more money with higher leverage with limited risk, so why not go for it. They will now boost risk modestly but I am certain not to the prior level that got us in this jam in the first place.
David Kamatoy: Having been in the business for 30 years, what is the most exciting piece of this Bill?
Craig G. Francis: I love to tell my clients I got them zero-fee SBA loans for their businesses and commercial real estate owner/user purchases. Just like the two approvals I got today. Oh, I also like to tell business owners that the government is here to help them.
I love to tell my clients I got them zero-fee SBA loans for their businesses and commercial real estate owner/user purchases.
David Kamatoy: The Bill also includes some tax breaks for businesses. How effective do you think these will be in stimulating business growth?
Craig G. Francis: Regarding the other items in the bill to help businesses, like accelerated depreciation, see my blog from two weeks ago. This administration does NOTHING to help ANYONE that does not disempower or enable the recipients of Uncle Sam's boon and well being. Trust me on this, if you take supper with the devil use a loooooong spoon. This administration is not business friendly. They are doing these things for appearances only and only to garner votes.
David Kamatoy: Who should really be paying attention to this Bill? Give us some examples of who this is going to benefit most and how it will help.
Craig G. Francis: The bill itself is a real benefit for the business owner using SBA loans. The waiver of the SBA fee, saving up to 3.5% of the loan for a 7(a) and about 1% on the 504, is a solid achievement of fiscal assistance to the business borrower. Startups with good credentials and support of equity injection and backup collateral should provide this borrowing class with an improved chance of getting financing. Expansion loans and business acquisitions will be more likely to get financing since the guaranty protecting a bank loan is now 90%, reducing the bank's potential loss dramatically, and at a historic low of 10%.
Commercial real estate purchases are also going to benefit. Presently we are seeing a 50 year low in rates, which makes the purchase of owner-user property very inexpensive in terms of fees and monthly payments. The benefits of owner-user property have always been a financial boon to the business since it improves the value of the business, secures long-term equity appreciation, and provides a tax shelter depreciation to the borrower. Prices on many properties and in many areas in the US have dropped 40% or more, so they are lower than any time in the last 20 years.
David Kamatoy: Are there any last concerns about the possible effects of this bill, anything we should watch out for?
Craig G. Francis: The people who should be paying closest attention to this bill are the banks. They risk taking on shaky loans because of the manna of high SBA guaranties. They also run the risk of a TARP-like intrusion into their credit affairs that could lead to loan steering from the highest offices in the land - or at least from the offices of Senators Chris Dodd and Barney Frank. They will micro-manage anything they have their political fingers into.
As for businesses, they don’t need to watch out too much. An SBA loan is a pretty decent form of financing and can do a lot to help secure a business owner's future if they use the funds judiciously and look to the long term well being of their firm before plunging into debt the likes of which can be obtained from the SBA bank loans. Once a borrower has the SBA loan funding, they are largely free to do what they please so long as they don't damage the collateral and make sure they make their payments on time. Just don't do anything crazy.
David Kamatoy: Craig, thank you for your time.
Craig G. Francis: My pleasure, David. Thank you.
Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722.
David Kamatoy is an entrepreneur and entertainer. Kamatoy Media Group is an interactive agency that works within social media, pr, email marketing and video. David originally interviewed Craig on his radio show in 2006. Shortly afterward it became clear that the place to communicate the message was clearly the internet. Craig G. Francis, Francis Financial, SBALoanstore are a client of the Kamatoy Media Group. Special Thanks to Editor Stephen Prendergast.