In the midst of tornado season and as oil spills into the Gulf of Mexico, small businesses nationwide look to operate in battered regions. A number of changes proposed by the Small Business Administration plan to help small and minority contractors land large contracts in disaster areas by increasing surety bond guarantee limits.
The SBA’s most significant proposals:
- Non-federal contracts and orders up to $5 million may earn a bond if the product will be made or service will be provided in the disaster area.
- The performance site need not be in the disaster area if a federal contract or order up to $5 million will directly assist the area.
- Agency heads who are involved with reconstruction efforts can request guarantees for contracts or orders up to $10 million.
Although the American Recovery and Reinvestment Act of 2009 included surety bond increases, these hikes pitched by the SBA plan to add to those in the act. Should these new limits take effect, the higher bond guarantee limits last for one year after the declaration of a disaster unless the SBA extends the duration for a particular disaster.
“These proposed changes are one more way we can help small businesses, particularly in the construction and service sectors, compete for and win critical contracting opportunities that help them grow their business and create jobs,” said Karen Mills, the SBA administrator, in a press release.
An office within the SBA
Since 1971, the SBA has worked with the surety industry so small service-sector and construction companies could get bonds otherwise unavailable in the commercial market. In creating this public-private relationship, the SBA’s Office of Surety Guarantees manages the Surety Bond Guarantee program. By backing a certain percentage of bonds, the SBA gives surety companies the confidence to issues bonds.
When contractors default on a project, the SBA recompenses the sureties a certain percentage of the bond amount. The Prior Approval program and the Preferred Surety Bond program guarantee 90 percent and 70 percent of surety’s loss, respectively. Last year the SBA raised the limit on bonds to $5 million from $2 million. In some cases, the SBA will guarantee bonds up to $10 million. These heightened maximums remain in effect through September 2010.
Surety bonds do not protect bond holders against a loss. Instead they repay the obligee when contractors default. The surety then seeks repayment from the contractor. With SBA surety bonds, the surety companies are actually the obligees and the government is the surety.
The SBA made it clear in its proposal that any insurance or indemnification costs in a bonded contract are not its responsibility, and therefore the SBA will not cover those costs. Businesses can find a list of recently declared disasters on the Federal Emergency Management Agency’s website.
On March 2, 2010, the U.S. Senate passed a bill that includes an extension of the Small Business Administration’s stimulus provisions. The final vote was 79-19, with 21 Republicans backing the bill, and the legislation was signed into law by President Obama on March 2, 2010. The House of Representatives had passed the bill on February 25, 2010.
The bill wasn’t without opposition. Jim Bunning, a Republican senator from Kentucky, mounted the strongest attack against it, arguing that the $10 million cost of the legislation was not offset by savings elsewhere in the budget. Bunning filibustered the bill but ultimately gave in. Before he relented, Sen. Mary Landrieu, the Democratic senator from Lousiana, said Republicans had “reached a new level of obstructionism.”
The bill as passed by the Senate reauthorizes the 90 percent guaranty on the Small Business Administration’s general business loans through at least March 28 if the guaranty is not re-extended after that date. The guaranty provides a $60 million appropriation to basically eliminate borrower fees for the 504 loan program in addition to the 7(a) loan program.
The SBA loan program is often a huge advantage to small business owners who can receive an SBA loan at often a lower rate than other loans without needing the amount of credit or business history that other loans often require. The Small Business Administration does not actually make the loans but instead provides a guaranty to the bank or lending institution that provides the loan so that the loan is of lower risk to the lending institution. The guaranty allows banks to be less restrictive about both the terms of the loan and the credit standards for the borrower.
The 90 percent guaranty is increased from the usual 75 percent and allows lenders to assume less risk for loans originating from the Small Business Administration than ever before. Additionally, the reduced fees for the loan products make them increasingly more appealing to potential borrowers which has dramatically increased the total number of loans administered since 2008. Prior to the increase in guaranty and reduction of funds, the SBA’s loan program was floundering.
The bill, as signed into law on March 2, also provides stipulations to extensions for jobless benefits, Medicare payment rules, federal highway spending, rules for satellite television, and funds for other popular programs.
Small businesses can breathe a sigh of relief — a much needed influx of funding to the SBA’s watershed recovery program is on the way.
Congress agreed last month to extend funding for the SBA Recovery Act through February. Part of the Obama administration’s massive economic stimulus plan, the legislation boosted funding to the agency’s two most popular loan programs. The measure met with incredible demand — small business owners grabbed about $375 million in stimulus funding, creating a shortage in capital that threatened to send loan volumes plummeting.
But legislators decided to keep the money flowing, at least for another month or so. About 1,000 small businesses were on a waiting list for close to $500 million in SBA loans.
“Small businesses have been left in limbo since the funding ran out in late November. Today’s action by the Senate will immediately clear the waiting list established by the SBA and will provide a lifeline to small businesses in need of credit,” said U.S. Sen. Mary L. Landrieu, D-La., chairwoman of the Senate Committee on Small Business and Entrepreneurship. “With these additional funds, SBA will be able to offer lenders a higher guarantee for 7(a) loans and a fee waiver on 504 loans, and reduce the cost of capital for small businesses by waiving the fees on both 7(a) and 504 loans. Reinstating these funds is important to small businesses and our overall economic recovery and job-creation efforts.”
Meanwhile, increases to the SBA’s Surety Bond Guarantee Program will extend through September. The agency is guaranteeing bonds to smaller contractors on projects worth up to $5 million — and in rare cases on public projects valued up to $10 million.
The bond guarantee covers four types of contract bonds: Bid Bonds, Payment Bonds, Performance Bonds and Ancillary Bonds. Small contractors can learn more by visiting the SBA’s Office of Surety Guarantees (OSG).
Small businesses suffering through a bleak economic stretch may get an injection of much-needed capital in the coming weeks.
Hoping to spur continued economic recovery, President Obama met with some of the nation’s top banking officials this week. During their meeting, the president urged lenders to target money toward American small businesses. The gathering included representatives from Bank of America, Wells Fargo, JP Morgan Chase and 10 others.
“Now, no one wants banks making the kinds of risky loans that got us into this situation in the first place,” Obama told reporters after the meeting. “But given the difficulty businesspeople are having as lending has declined, and given the exceptional assistance banks receive to get them through a difficult time, we expect them to explore every responsible way to help get our economy moving again.”
Some of the nation’s largest lenders — including those who received billions in taxpayer bailout funds — have already responded positively. Bank of America announced it would boost lending to small businesses in 2010 by $5 billion. Weeks before, JP Morgan Chase made a similar pledge, claiming it would increase lending to small businesses by $4 billion.
The presidential prodding and subsequent pledges to increase small business funding comes at a critical time for many American entrepreneurs.
Small business owners have already burned through about $375 million in stimulus funding allotted to the Small Business Administration. The shortage of funds has the potential to send loan volumes through the floor.
The influx of governmental funds to the SBA’s two most popular loan programs — the 7(a) and the 504 — met with huge demand. Now, entrepreneurs are waiting to see if the government will make good on its desire to restore the added funding through mid-February.
But this week’s news regarding a renewed push to lend by private banks could make the wait a bit less painful.
It might also signal the start of repayment from some of the lenders who got a helping hand from the American public.
“America’s banks received extraordinary assistance from American taxpayers to rebuild their industry, and now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild our economy,” President Obama said this week.
Small business owners have drained the Small Business Administration’s two most popular loan programs of excess stimulus funds, a shortage that could send loan volumes tumbling without government action.
Hoping to spur small business growth, the federal government earlier this year injected about $375 million into the SBA’s 7(a) and 504 loan programs. The influx aimed to curb fees on SBA loans and boost the administration’s loan guarantees to 90 percent for some programs.
Fighting a tight credit market, thousands of entrepreneurs flocked to the funding. As of Monday, the SBA had exhausted the entire $375 million allotment. Now, business owners nationwide are waiting to see if a crucial source of financial stability is gone for good.
“We are continuing to work with Congress on funds to continue these programs, which have helped engineer a turnaround in SBA lending following last year’s credit crunch and resulted in more than 40,000 loans to small businesses during these tough economic times,” Jonathan Swain, assistant administrator for communications and public liaison at the U.S. Small Business Administration, told reporters this week.
The government is looking for ways to keep the program upgrades going through mid-February. Initial estimates put the price tag around $100 million.
In the mean time, the SBA started a waiting list for companies that can afford to hold off for funding lines to be re-established. Companies with conditional approval can get a spot in the Recovery Loan Queue.
President Obama is expected to push Congress in the coming weeks to restart funding for these key SBA loan programs.
In all, the SBA has received more than $730 million in federal stimulus dollars.
Small business owners who work on projects requiring surety bonds have received a boost from the federal government.
The Small Business Administration can now guarantee bonds on contracts up to $5 million for small businesses that otherwise struggled to obtain surety bonds through traditional channels. This temporary increase – a full $3 million higher than the previous limit – will remain in place through September 2010.
There are even special cases where the SBA will guarantee all surety bond types on contracts valued up to $10 million, provided the contracting officer certifies that the guarantee is in the best interests of the government.
These temporary increases are aimed at helping spur recovery in the construction and service industries. Because of their size, small businesses are at times at a competitive disadvantage when competing for government contracts. These expanded guarantees provide an additional layer of financial security for both smaller firms and project owners – the SBA reimburses anywhere from 70 to 90 percent of the costs incurred if a contractor defaults.
“Raising the surety bond limit is a critical step in making sure small businesses in the construction and service sector have access to federal contracting opportunities that will help drive economic recovery,” SBA Administrator Karen Mills said in a news release. “These changes support small and emerging businesses nationwide, particularly construction contractors who have seen their markets hurt by a poor economy and lagging construction.”
Surety bonds are basically three-party agreements that guarantee a project will be completed. They also provide financial protection for project owners in the event of default or some other debilitating development. The SBA’s guarantee covers four types of common contract bonds:
Bid Bond – guarantees the bidder will enter into the contract and provide payment and performance bonds.
Payment Bond – guarantees the contractor will pay all laborers and suppliers.
Performance Bond – guarantees the contractor will follow contract and all applicable terms and regulations
Ancillary Bond – bonds that are incidental and essential to the performance of the contract.
Entrepreneurs interested in utilizing the program must qualify as a small business within their industry, as defined by the North American Industry Classification System (NAICS) Code. They will also have to meet the financial requirements of an individual surety company – the SBA does not issue bonds.
Contractors will have to provide financial documentation and credit histories when applying for a surety bond. Consumers can see a list of participating surety companies and agents here.
Bond costs vary depending on an applicant’s financial status and the individual surety. Contractors will be on the hook for a bond premium. The SBA also charges the applicant a fee of $7.29 per $1,000 dollars of the contract amount.
American small businesses might be in for a huge boost thanks to the Obama administration.
The federal government is considering whether to inject millions, if not billions, of dollars into the Small Business Administration’s 7(a) loan program, according to recent published reports.
The additional funding would come from the Troubled Assets Relief Program, or TARP, which the administration has used to help prop up the flailing banking and automotive industries. So far, it’s unclear how much money the government might inject into the SBA’s most popular loan program or how the funding might be utilized by consumers.
Small businesses employ about half of all private-sector employees and have generated 60 to 80 percent of new net jobs annually over the last decade, according to the Small Business Administration.
“Small business is the backbone of American jobs and innovation,” White House spokesman Matthew Vogel told the Washington Post. “We are deeply committed to continuing to work every single day to devise and implement policies that will help small businesses through these challenging economic times.”
Named for a section of the Small Business Act, the 7(a) program provides a guaranty of up to 90 percent for loans to small businesses. Scores of American banks participate in this program, along with some non-bank lenders. Private lenders ultimately make and administer the loans.
Through June, the SBA had approved less than half the $17.5 billion worth of loans allotted for fiscal year 2009.
The SBA’s most common loan program, the 7(a) loan can be used for a host of business purposes, including equipment and real estate purchases, renovations and new construction, debt refinancing and working capital.
For those seeking loans for working capital, maturity runs up to 10 years. For fixed assets, loan maturity is typically up to 25 years.
The government’s potential cash infusion would be the latest in a series of moves aimed at bolstering American small businesses.
In June, the SBA announced it would permanently expand its popular 504 lending program to help small business owners refinance for the purposes of expanding or purchasing new equipment or supplies.
Fees have been reduced on both 504 and 7(a) loans, and the agency recently raised its surety bond guarantee to $5 million for construction contracts.
The U.S. Small Business Administration has permanently altered a loan program for entrepreneurs, part of a national push to help beleaguered business owners spark economic turnaround.
The agency announced Wednesday that it would expand its popular 504 lending program to help small business owners refinance for the purposes of expanding or purchasing new equipment or supplies. Qualified borrowers will be able to refinance their current SBA loan and roll over up to half of the total cost of the purchase or pending expansion.
For example, a small business proprietor with a $500,000 SBA 504 program loan could refinance to leverage up to $250,000 for equipment or an expansion. But for every $65,000 backed by the SBA, a borrower is required to create or retain a job.
Business owners must also have kept debt payments current for at least a year.
The program’s expansion is part of the federal stimulus package enacted this spring by Congress. Federal officials hope the ability to restructure debt can help companies improve cash flow and boost job growth.
“This is one more piece of the Recovery Act that is going to have a direct impact and put more money in the hands of small business owners just when they need it most,” SBA Administrator Karen G. Mills said in a news release. “Lower interest rates mean lower payments and less money going out the door each month in debt repayments. That means more cash on hand to keep their doors open, their employees working and to even expand and create more jobs.”
Ovcrall, 504 loans are down about 41 percent this year so far, with the agency approving about 3,900 loans worth $2.28 billion. At this time last year, the SBA had already approved about 6,700 loans worth nearly $4 billion.
But the SBA’s 504 program experienced a surge in lending – up about 31 percent – in the six weeks after the stimulus package took effect. Renewed interest in the 504 program is expected to continue as borrowers look for new avenues to restructure debt or forge ahead with expansion projects.
The 504 makeover is the latest in a series of changes to SBA programs mandated by the American Recovery and Reinvestment Act of 2009. The agency’s flagship 7(a) loan program saw many of its loan guarantees jump to 90 percent. Fees have been reduced on both 504 and 7(a) loans.
The SBA also recently raised its surety bond guarantee to $5 million for construction contracts.
“All of these steps, along with other Recovery Act provisions, are aimed at increasing access to capital and giving small businesses just what they need to help lead our nation’s economic recovery,” Mills said.
Yes, as CNN Money reports, that’s a grim headline. But, the news on the SBA loan front isn’t all bad.
One vote of confidence can be found in the increase in lending after the Stimulus Act was signed. “Comparing the months before and after the February 17 stimulus signing, the SBA reports a 24% jump in the number of 7(a) loans it has backed,” CNN stated.
The article goes on to state that over 400 SBA-approved lenders that had not made a 7(a) loan since September have made an SBA loan since the Stimulus Act was signed.
Although the SBA stats seem weak over the past year or two, the program is making a resurgence as lenders gradually regain some confidence in the market. To read beyond my summary, check out the full article on CNN Money.
On June 15, the SBA began it’s new micro loan program, appropriately titled “America’s Recovery Capital Loan Program.” The program was created to help small business owners pay existing debts and make meeting payroll easier.
Borrowers can get SBA guaranteed loans of up to $35,000 which can be applied to meeting short term debt obligations like mortgages, credit card payments, supplier bills, and so on. The loans have 0% interest, no fees, and can be amortized over a maximum of 5 years.
You might be wondering, what’s the catch? Well, for borrowers there is no catch. Lenders earn money off the interest free loans because the SBA directly pays them prime+2%. If the borrower would happen to default, the SBA guarantee kicks in and they pick up the rest of what’s due to the bank.
Unfortunately, start up business do not qualify for the ARC Program–it’s strictly reserved for existing businesses.