Small Businesses Begin 2018 on a High Note

Small Business Administration loans surged nearly 20 percent year-on-year in recent months, signaling continued economic growth

Small-business optimism in the United States soared last year, reaching the highest level in decades. Thanks to strong credit markets, entrepreneurs have better access to funds now than at any other time in the past decade. And looking ahead, small businesses have more reasons to remain upbeat.

The current fiscal year has already seen a record amount of loans backed by the U.S. Small Business Administration (SBA). The key lending program, SBA 7(a) loans, surged nearly 20 percent year-on-year in dollar terms in the first quarter of the 2018 fiscal year ending December.

“When you get more of those dollars flowing down into small businesses, then you are really adding money into the economy, and that’s good growth,” SBA administrator Linda McMahon told The Epoch Times.

More than 96 percent of the businesses in the country are small, and they employ about 49 to 51 percent of American workers, McMahon said. “It’s just imperative that we keep them strong and keep them growing.”

SBA supports small businesses by providing guarantees for bank loans. Nationwide, SBA loan programs provided more than $30 billion to small businesses last year.

Nearly 85 percent of SBA-backed loans are under lending program 7(a), which covers the vast majority of small-business needs, including working capital, machinery and equipment financing, and export support. The remaining loans are under the SBA 504 loan program, which finances the purchase of land and existing buildings.

SBA also provides loans directly to businesses and homeowners under a disaster recovery program.

“My goal for SBA, first and foremost, is to make sure that it is not the best-kept secret in the country,” said McMahon.

In addition to funding programs, SBA offices and resource partners throughout the country provide counseling, training, and mentorship programs, and most of them are free to small-business owners.

These are very beneficial tools for entrepreneurs but are not well known, McMahon said.

To better promote the organization both outside and within the government, she and her team are planning to roll out a marketing campaign in May called “SBA Reimagined,” with new marketing messages and a new logo.

“I want to continue to get the word out about it so we can help more small businesses,” she said.

Tax Cuts and Deregulation

Besides a positive lending environment, small businesses are also getting a big boost from the Trump administration’s pro-business policies, including tax reform and deregulation.

According to the National Federation of Independent Business (NFIB), small-business owners are exuberant about the economy. The NFIB optimism index increased sharply in 2017, reaching one of the highest levels in 45 years.

“Small-business owners were waiting for better policies from Washington, suddenly they got them, and the engine of the economy roared back to life,” NFIB Chief Economist Bill Dunkelberg stated in a report.

Small-business optimism could lead to further upticks in economic growth. The New York Federal Reserve is currently expecting GDP growth for the fourth quarter of 2017 to reach close to 4 percent. And in 2018, GDP will likely expand by close to 3 percent, according to JPMorgan Chase & Co.’s estimates.

“This is a great atmosphere that’s happening right now in our country,” McMahon said.

Since she took office last year, she has visited 27 states to meet entrepreneurs.

Business owners are excited, she said. “Once the impact of that [tax reform] hits their bottom line, without doubt, they’ve all said that they would reinvest in their businesses.”

Entrepreneurs are willing to expand their businesses, hire more people, increase wages, and provide some other benefits to their workers, she said.

Lenders Are Bullish

Banks have also started to loosen purse strings to borrowers. Small-business loan approval rates increased last year, reaching a new high level in November last year.

“By and large, most of the businesses we’re seeing are having very positive trends, which makes it a good lending environment for us,” said Tom Pretty, head of SBA lending at TD Bank.

TD Bank has become one of the top lenders of SBA-backed loans. Its volume of loans under $350,000 more than doubled, and the volume of bigger loans saw 20 percent plus growth last year.

“Within our Maine to Florida footprint, we are planning to continue to grow in small-business and SBA lending,” Pretty said.

U.S. small businesses are seeing one of their strongest years in terms of financial performance and on the balance sheet. The customers have positive revenue and net income trends, and their debt service coverage ratios are strong, he explained.

It is a good environment for borrowers, too. Overall, the economy is solid, markets are strong, and interest rates are low.

“So business owners are cautiously optimistic,” he said.

TD Bank experienced large growth in business acquisition loans, franchise loans, and commercial real estate loans last year.

“Almost every loan we do is to somebody who is hiring and making an investment,” Pretty said.

The lending environment has also become more competitive, which is good news for borrowers. TD Bank is attending many industry trade shows to meet potential customers and “we are definitely seeing more and more lenders at all those events,” said Pretty.

SBA has recently made changes to its requirements, which are positive for business owners.

For example, the maximum duration for one of the key loan programs, 504, will be increased from 20 years to 25 years in the second quarter of 2018, Pretty said. The SBA 504 is a fixed-rate and long-term loan and hence one of the best financing options for small-business owners.

In addition, another change is that the SBA guarantee for business acquisition loans has been increased from 75 percent to 90 percent.

These changes are all positive, helping entrepreneurs improve their cash flow and enabling them to expand their businesses, he said.

Increasing Lender Participation

The recent changes in the lending environment present a dramatically different picture compared to what small businesses faced for almost a decade. Over-regulation following the 2008 financial crisis made it harder for community banks to serve small businesses. The number of small banks dropped as a result of consolidation or bank failures.

Many of the community banks that are still operating under Dodd-Frank rules, especially the Volcker rule, don’t have the same freedom to lend, McMahon said. And therefore, any deregulation in that space would be very helpful for small businesses, she added.

SBA has bigger goals for 2018. The agency wants to increase the participation of smaller lenders and community bankers in its loan programs and leverage their existing relationships with local business owners.

Through online marketing, “we want to reach out more into our rural areas,” she said. “It’ll be one of our focuses in 2018.”