Small business lending drops 57%

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SBA loans dropped 57% last quarter, a grim sign of how bad the lending market has become for small businesses seeking capital.

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NEW YORK (CNNMoney.com) -- President Barack Obama warned recently that small business lending had declined so sharply that the Small Business Administration was on track to back only half as many loans this year as it did last year. The SBA's lending data for the just-ended quarter bears out that bleak forecast: The number of loans the agency backed though its flagship program declined 57%.

The SBA backed $1.59 billion worth of loans in the three months ended March 31, a 47% drop from the same quarter last year. The total number of loans made through the 7(a) program was 8,278, down from more than 19,000 issued a year ago. In the first half of its 2009 fiscal year, the SBA's total 7(a) loan volume was $3.5 billion, down from the $6.2 billion lent in the first half of last year.

Small businesses seeking loans are fighting a number of opposing forces. "SBA lending is down due to the credit crunch, the economic crisis, and the frozen secondary market," said Jonathan Swain, an SBA assistant administrator.

Though the numbers for the quarter are grim, Swain says the agency sees hope in the data collected since March 16, when two stimulus provisions - temporarily waiving fees for the SBA's loan programs and increasing to as much as 90% the portion of each loan it will insure against default - were implemented.

The weekly average 7(a) loan volume from January until that point was $120 million. But in weeks following March 16, that average has jumped to $146 million, Swain said.

"We have seen an increase in the loan program in just two weeks," he said. "This indicates that these pieces are doing what they were designed to do and helped curb the downslide in lending."

But Swain warns that more still needs to be done for the loan numbers to get back to where they were before the recession. "I don't think there's one silver bullet. One of these initiatives alone won't solve the problem. It's a combination of efforts, from the Treasury and the SBA to work at the overall problem."

The SBA's loan programs guarantee a portion of qualifying loans made by banks to small businesses, a system intended to make loans available for ventures that would otherwise be considered too risky. But stiff collateral requirements and other restrictions have put even SBA loans out of reach for many entrepreneurs, while banks also clamp down on other small business funding channels like credit cards, credit lines and non-SBA loans.

Several banking institutions that have pulled out of the SBA's lending program have blamed the secondary market, where banks resell to investors bundles of the loans they've made. Since the fall, that market has been nearly frozen, and banks unable to resell their loans say they lack the liquidity to make news ones.

In her confirmation hearing on Wednesday before the Senate Small Business Committee, incoming SBA administrator Karen Gordon Mills emphasized the importance of quickly implementing the Treasury's planned $15 billion program to purchase SBA loan bundles on the secondary market. She also pledged to swiftly plan and get into operation the remainder of the stimulus provisions, which are designed to provide relief to small businesses seeking capital.

"Our folks are focused on how important these programs are and what these programs and resources can mean for small businesses across the country," the SBA's Swain said. "With more coming online soon, this is a good early indication that the measures thus far are working. We're glad to see it."