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Will Expanding the $2 Million SBA Limit Help Create Jobs?


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One thing is for sure when applying for a loan these days: You can’t get more than $2 million. That’s the government’s limit on SBA loans, and the virtually non-existent conventional market hasn’t picked up the slack. So operators needing more than $2 million to open a business have been largely out of luck.

Congress may change that. Its members are painfully aware of the stubbornly high unemployment rate and the potential it has to wreak havoc on incumbents, particularly those of the party in power, once the mid-term elections arrive in seven months. By all accounts they are eager to do something about jobs, and many view an expansion of the SBA lending limit as a job-creation strategy. But will it work in the franchise sector? “It absolutely will,” said Darrell Johnson, CEO of FRANdata and a former banker. “The biggest challenge that franchise financing has had has not been challenges to SBA, but related to conventional lending, which has essentially disappeared. You have to make up for it somewhere, or you have capital shortages, which is what we’ve had.”

How big the limit expansion will be remains uncertain. Two proposals in Congress were being considered as of press time. The House bill would expand the limit on the most popular 7(a) loans from $2 million to $3 million. The Senate bill, strongly backed by business groups such as the IFA, would expand that limit to $5 million. SBA 504 loans’ limits would expand to $5.5 million under the Senate proposal. Both bills would do other things, notably extending the expanded SBA loan guarantee to 90 percent from 75 percent, considered to be one of the main catalysts behind the increase in SBA lending over the past six months. Indeed, a bill without that expansion could result in another reduction in SBA lending, experts say.

President Obama has indicated a strong willingness to sign a bill expanding the SBA limit, and he also proposed providing $30 billion from stimulus funds to community banks to kick-start small business lending. Experts are skeptical about the $30 billion plan because concern about risk, and not access to capital, is keeping lenders from making loans. There’s also skepticism about two other administration proposals. One would allow businesses with commercial mortgages coming due to refinance that debt through the SBA’s 504 program. Another would expand the limit of the SBA Express loan program from $300,000 to $1 million. Those proposals drew strong criticism from New York Democrat Nydia M. Velázquez, chairwoman of the House Committee on Small Business. She said the refinancing program would not create jobs, and that the SBA Express program has too many defaults to consider an expansion.

But there is little skepticism, at least among small business lending advocates, that an expansion of the 7(a) and the 504 limits would generate more loans. That $2 million limit has increasingly stood in the way of more development as financing in the small business market has shifted from conventional to government-backed loans. This is particularly true of higher-cost franchises where the initial investment is well above $2 million—like owner-operated hotel chains, which frequently can’t qualify for an SBA loan on an initial investment without a significant amount of equity on the investor’s part. And they struggle to get conventional financing.

Gus Stamoutsos, executive vice president of franchise development for Wyndham Worldwide, owner of several such hotel brands, said many of those hotel companies could easily qualify for SBA loans in the past. But increases in construction and other costs pushed those initial investments higher. While some hotel operators still receive SBA financing, they have to attract other investors or more equity to qualify under the limit. So fewer hotel deals are done with such loans. “It’s a little more difficult today, as prices as some of the projects have increased,” Stamoutsos said. “Land costs are coming back down a little bit. But it’s not sufficient enough to create a project.” An expanded limit also would help lower-cost franchises, such as sub shops with average investments of $200,000 to $400,000. That gives operators who’ve reached their SBA lending limit the option of borrowing more to open more shops. “Say you have a Bojangles franchisee with three units open,” said Ron Feldman, CEO of Siegel Capital Corp. “They’re already at the $2 million cap. This allows them to expand and get three or four more units.”

One area where an expanded cap could have a quick impact is on the acquisitions market, where higher-priced deals often can’t be done because of credit problems. Michael Ingram, vice president of National Franchise Sales, said an expansion of the loan limit “would be good news. It couldn’t be bad news.” And he said that a few buyers do bump up against that loan limit and have problems acquiring a franchise unit.

Indeed, some brokers are already eager to see an expansion of the SBA limit. “I want to be the first one to get in over $2 million,” said Steve Mariani, president of Diamond Financial, based in North Carolina. “I have a signed offer to purchase at $2.912 million. I can get it done, as soon as they increase that cap.”

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