Shutdown Halts SBA Lending
With the federal government temporarily out of business, the SBA isn't approving any loans. But that doesn't mean that Ken Allen, senior business development officer at SBA lender Evolve Bank, has been spending the past week cleaning his office or shuffling papers.
"We're just moving things forward as best we can under the circumstances, so we're prepared when they reopen," Allen said, "Assuming they do."
In fact, Allen said, he'd been prepared for the shutdown. Allen is a veteran small business lender—he remembers the previous shutdown, 17 years ago, as well as the routine stoppages when the SBA runs out of money and can't approve any loans. "We were anticipating this a little bit," he said. "We got deals far enough along in the process so we could get them approved prior to the shutdown."
Still, that doesn't mean the shutdown isn't affecting loans, or that it won't. And the longer the shutdown lasts, the bigger the impact it will have, delaying sales and construction projects because of a lack of financing.
The National Association of Development Companies, or NADCO, the association of nonprofit certified development companies, estimates that the shutdown is keeping $96 million of small business loans from being approved every day. Franchises rely heavily on SBA loans, especially in the post-recession environment. Franchises borrowed $3.8 billion in SBA loans in 2012, according to NADCO. So the shutdown is costing franchises more than $10 million a day.
"It's a major disruption," said Beth Solomon, NADCO's executive director. She also suggested that a shutdown, coupled with congressional refusal to approve a hike in the debt ceiling, could cause even more havoc for those CDCs: it could disrupt their bond sale in November, if the shutdown isn't ended by then.
The CDCs sell bonds to fund the loans they make to franchises and other businesses. If the size of that bond offering shrinks, it becomes a riskier bet for investors, who charge higher interest rates. Those higher rates would be passed onto borrowers once the lending does restart. "So the small businesses are losing," Solomon said. "They're getting beaten up, on many levels here, by this shutdown."
For now, the shutdown appears to be delaying some deals because the government isn't operating to approve the loans being made. The shutdown could cause havoc for buyers of businesses that have closings approaching—delaying financing to get some deals done. Solomon said she heard of one situation in which a buyer demanded a higher price because of one shutdown-caused delay.
Some borrowers could seek conventional loans, and bigger banks have been more likely in recent months to make those loans to smaller borrowers. Such loans could come with higher interest rates. But Allen said he thought that borrowers who could access conventional loans would have done so already. So those borrowers will have to wait.
But how much this shutdown will be felt by franchises and other small businesses all depends on how long the shutdown lasts. And right now, betting sites seem to think that the shutdown will last until October 18—the day after the debt ceiling deadline. "There's no end in sight to the government shutdown," Solomon said. "Right now it's shut down (because of the lack of a funding agreement). And then we run out of money on October 16, 17. If there isn't a plan in place by October 16, you'll see the market go crazy.
"It's very, very serious."