It’s day 11 of the government shutdown, and small businesses that rely on Small Business Administration guaranteed loans may soon start running out of capital.
The SBA approves about $93 million of small business loans every day, often for new projects and capital investments. It has had to shutter most of its lending programs, cutting off access to 7(a) loan guarantees, 504 certified development loans and microloans, during the U.S. government shutdown. The SBA processed as many loan applications as possible before government offices closed, and many banks and other lenders are continuing to process loans and send them to the SBA for post-shutdown approval, Businessweek reported on Tuesday.
But if a small business’s working capital runs out or it needs investment funds quickly, where can it turn while the SBA is not operating? The options are limited. A small business could apply for a loan from a credit union, says Paul Gentile, executive vice president for the Credit Union National Association (CUNA). Credit unions offer SBA-backed loans, but they also lend separately to small businesses, often for smaller projects. “Credit unions do a lot of loans for the smaller small businesses – the average loan is just over $200,000 – [like] a landscaper that needs another truck, or a local restaurant that needs equipment.” Firms have to join a credit union to secure this kind of funding. But they can apply and become a member within a few days, or even hours, Gentile says.
But credit unions may not be able to supply enough long-term funding for many small businesses, says Bob Coleman, editor of Coleman Report, a small business lending newsletter. “A credit union is not going to do a $250,000 loan without a guarantee [from the government],” Coleman says. (Gentile, for his part, says they might — but it depends on the financial institution.) But credit union funding could be a stopgap for companies while the government is shut down, Coleman says.
Other small companies may consider alternative loan types such as cash advances, asset-based loans and peer-to-peer financing. Alternative lenders “are great if you need short-term money,” Coleman says. But they are also only a stopgap, he says. They typically require short-term repayment, often at much higher interest rates (ranging from around 18 percent to 50 percent, typically), he says.
“I see alternative lenders as useful if, say, your air conditioning goes out and you have to get it fixed today or you’ll go out of business,” Coleman says. For many companies, that type of scenario is now a reality under the shutdown, he says. Even if they’re desperate, small businesses should be “prudent, and explore all their options,” he adds.
SBA loans offer small business borrowers a number of advantages. For one, they allow businesses to borrow more capital than they could without a government guarantee, Coleman says. Companies can also amortize SBA-guaranteed loans over longer periods than other loans, reducing the size of the payment and bolstering their cash flow. And currently they typically pay an interest rate of 6 percent to 7 percent.
When the federal government finally reopens, the SBA loan program will face a significant backlog, Coleman says. Businesses that can’t wait for the SBA to catch up might have to plug their funding holes in the meantime.