SBA Announces Alternative Base Interest Rate
Access to Small Business Capital More Obtainable
Nov 15, 2008
The Small Business Association, recognizing that markets are frozen due to liquidity concerns has recently implemented two changes in policy that will give added incentives to small business lenders.
Identifying the difficulties, the SBA has acted to address current market issues that were stalling financial assistance for both the small business and the banking community. According to Eric R. Zarnikow, the SBA’s Associate Administrator for the Office of Capital Access, the SBA’s quick move on these changes will free up SBA-backed capital.
The LIBOR Rate
The LIBOR (London Interbank Offered Rate) international rate is used in England when banks lend money to one another. This includes international banks. The index is used to set the rate in variable rate loans. Changes have usually been smaller than the Wall Street Prime Rate. The mismatch between the two had previously hindered the competitive rate for SBA backed loans.
Allowing use of both the prime rate and the LIBOR will make SBA backed loans more much more attractive to lenders, as the option now exists to allow costs of the lenders to be based on the one-month LIBOR rate.
SBA Changes Allow Flexibility in Lending
This interim rule will now let lenders use both rates, which will allow its lending partners to expand the opportunities for small businesses to sucessfully secure loans.
In a November 13, 2008 press release, SBA’s Acting Administrator Sandy K. Baruah announced “By allowing both rates, SBA is making its programs more flexible, increasing opportunities to access capital and giving both lending partners and small business customers more options to meet their needs.”
Flexibility has also been introduced into a new structure that will assemble SBA loans into pools for sale in the secondary market. The average interest rate will make these loan pool structures easier to create. This, in turn, supports incentives for investors to bid on these loans.
The SBA is hoping that these changes will allow the needed growth capital for small business, translating into the creation of new jobs.
Looking for the SBA Loan
The Small Business Association does not directly lend money to businesses, but instead provides backing to private lenders, making small businesses in need of loans more attractive to their local banks.
As Mr. Barauh had previously announced in October, private institutions reduce their risks with small business loans backed by the SBA as these loans are guaranteed up to 85%.
The number of SBA-backed loans declined in fiscal year 2008, due to the uncertainity of business owners willing to borrow in financially uncertain times, and the tightening of credit. Although those numbers decreased by 30% from 2007, the actual monetary size of 2008 loans showed an increase.
Mr. Barauh has announced that the agency is holding meetings countrywide to better understand how lenders and small business can be helped to get through hard financial times.
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