Shutdown cutting off loans for small businesses

Over the past year, small community banks - rather than traditional big banks - have been responsible for much of the funding for small businesses. Mark Strassmann reports the big opportunities they're providing.

(Moneywatch) The government shutdown has come at exactly the wrong time for small businesses, shutting down loans and freezing government contracts just as that sector was getting back on its feet.

The closure of the Small Business Administration has cut off a key source for small and lower rate loans just as businesses are preparing for the Christmas rush. The SBA is critical because it guarantees tens of billions of dollars worth of loans each year. The department also helps small firms export internationally, obtain government contracts and secure start-up financing - all of which is also now on hold.

"This is the worst time for the shutdown to happen," said Rohit Arora, co-founder and CEO of Biz2Credit.com, a website that helps small business owners connect with lending institutions. "This will force small businesses to borrow expensive, short-term money they need in preparing for the holiday season."

Because of the closure of the IRS, which provides income verification data, many small businesses will only be able to get those higher rate loans if they already have existing relationships with a bank and if the loans are large enough to interest the bank in the first place.

"We do a lot of gas station financing," Arora said. "Up until 2008 banks were willing to do gas station loans conventionally. After that they said we won't take gas station loans. When you take deals below $5 million, which is typically what 99 percent of these deals would be, all of those deals now happen under the SBA."

Arora says small businesses are starting to get desperate for the working capital they need to pay employees and suppliers. Typically they have two to three weeks' worth on hand, but the lack of progress in talks in Washington means many will have to scurry to find alternate funding.

Small businesses will face yet another hurdle even after the SBA reopens. Under a program that was set to take effect Oct. 1, the SBA was going to waive all guarantee fees for loans below $150,000. The program is part of President Obama's 2014 budget, which has yet to be passed. When the government reopens it will do so under a resolution that keeps funding at last year's levels, and no new programs will start until such time that the budget itself is actually passed.

There is concern, for the reasons listed above, that even if the shutdown ends today, it has already lasted long enough to impact the economy long after the government re-opens.

"It's also knocking the confidence out of small businesses and consumers," Arora said. "The economy was just starting to recover in the last month, month-and-a-half. In 2011, the last time a fight over the debt ceiling happened, it had a negative impact on consumer sentiment for at least three or four months. So my worry is if this problem doesn't get solved in the next two weeks it's going to send a very bad signal to small businesses and force them to curtail any of their expansion plans."

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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