The Lowdown on Small Business Lending with Peter Downs (Part 1)
There’s been a lot of discussion in 2010 surrounding the role the small business community plays in the current economy – specifically, how small businesses could very well be the key to pulling us out of the recession.
The White House has gone to some great lengths to ensure those small businesses looking for funding are able to have a fair shot in accessing those funds – in fact, the Small Business Administration (SBA) stimulus extension was renewed yet again. Of course, the hope is that of those small businesses who receive SBA Loans, all will not only invest in their businesses, but hire more employees which will hopefully help to make a dent in the staggering 9.7% unemployment rate.
Keeping up with all of the emerging news from the small business sector can be daunting, so I turned to Peter Downs, President of Newtek Business Lending. Not only did Peter help to shed some light on the situation, but he also clarified how non-bank lenders factor into the mix…
Peter, can you briefly clarify how the recent stimulus funds affect the overall SBA lending program?
Peter: The SBA program has been around for 50 years – it’s always been funded. With the new stimulus funds, all that means is that there are additional funds earmarked for small business lending in addition to what has existed in the past. The stimulus also guarantees 90% of the loan rather than 75% percent of the loan as in years past. That 15% is crucial as it’s covering a greater amount of the loan. If for some reason the borrower defaults, the SBA steps in and actually pays back the lender, thus, minimizing the risk to the lender.
Let’s talk about how this plays out on the front lines. Would a small business owner typically approach a non-bank lender like Newtek for funding?
Peter: In the past I would have say the answer is “no.” Simply because small businesses tend to utilize three different things to fund their business:
- First, they use the equity in their home because it’s cheap and easy for them to use, and it’s something they own.
- Next, they’d probably go to their local bank where they had a deposit relationship and ask them for some kind of financing or line of credit against their business assets.
- Lastly, they would probably consider credit card financing.
That was all in the past though. Most people no longer have much equity in their homes – if they do it’s very hard to get a loan that way as credit criteria has changed significantly. Because banks’ balance sheets have been beaten up so badly by all of the problem loans they’ve serviced, they’re more focused on managing the current situation rather than offering new lending. Obviously credit cards have gone by the wayside because they’re unsecure, and some of the changes Congress has made in how you can charge late fees have made it less profitable for banks and others to issue cards.
Essentially, the economy has wiped out most of the “old ways” of securing funding and so small business owners have had a much tougher time accessing funds. Which is where non-bank lenders enter the picture.
Which leads right into my next question. Why is a non-bank lender a good alternative?
Peter: Non-bank lenders, like Newtek, don’t have balance sheets laden with real estate loans that didn’t perform, don’t have weird investments on their books like large banks, and generally aren’t weighed down by complications. What’s more, we have access to the SBA program, which is being pushed forward aggressively as a viable solution for small business owners. All of these factors make us a unique option for lending.
Be sure to check back for the conclusion of this series when we discuss non-bank lending and its community bank partnerships next week.
In the meantime, we want to hear from those of you who have attempted to secure small business funding recently. Were you successful? Also, have you considered non-bank lending as an option? Tell us about your experience.