SBA loans saved businesses from Covid – now they could ruin them

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As the owner of Bane, New York City’s biggest haunted house attraction, Jennifer Condron knows all about spooky situations. Except what to do with her bank loan.

Condron’s BulletProof Productions LLC received a $350,000 loan secured by the US Small Business Administration in 2019 before the Covid-19 pandemic closed entertainment venues and dried up their revenues. Under the exceptional circumstances, the Agency issued guidance early on March 2020 that encouraged lenders participating in its 7(a) program to allow payment deferrals for six months and beyond.

However, the latest extension of this policy, one of the last remaining forms of pandemic assistance for businesses, expires at the end of September. Borrowers who don’t have the funds to repay the loans due to the pandemic, such as those who have been relying on foot traffic from people working in offices, will have few options to stop lenders from demanding payments, lawyers for small businesses.

Condron’s bank has already tried to take her to court, which in turn resulted in her being rejected by a federal pandemic relief fund for closed entertainment venues. She has already drawn down both a Paycheck Protection Program (PPP) loan and an Economic Injury Disaster Loan (EIDL). Now her hopes depend on winning an appeal for the bursary for the venue before she has to file for bankruptcy.

More defaults and bankruptcies are likely unless the agency — or Congress — acts.

“I paid every single bill, every single monthly bill, on time,” Condron said of her pre-pandemic financial situation. “It’s not that I don’t pay my bills, I’ve always had excellent business and personal credit. Now I have no credit.”

lifeline

The SBA’s 7(a) program provides government-guaranteed loans to small businesses that otherwise cannot obtain credit from banks due to thin credit records or other risk factors.

Before the pandemic, it was the agency’s most popular program. Since fiscal 2008, it has approved approximately 730,000 loans valued at more than $270 billion. Typically, an owner provides valuable personal assets in the form of vehicles or real estate as collateral – or in the case of a haunted house, lights, cameras and sound equipment.

A lender then approves the loan, sets the repayment terms, and pays out the money.

The program, which has a maximum loan amount of $5 million, is popular because it is the last channel for many small businesses to get larger financing from predatory lenders. The option was attractive to Condron as she was looking to build on the more than $1 million in annual revenue her company had been generating before she received the loan.

But if a borrower fails to repay the loan, the lender must sue to trigger the federal guarantee, which is up to 75% for loans over $150,000. This often means the confiscation of business and personal assets that the borrower has provided as collateral.

Throughout the pandemic, the agency has paid lenders principal, interest and all associated fees on the loans owed by borrowers so they don’t suffer too much missed payments.

The deferral policy, as well as other assistance programs offered by the SBA, such as PPP, EIDL, Shuttered Venues Operators Grant, and Restaurant Revitalization Fund, has staved off a wave of defaults.

All programs except EIDL have expired, and without an updated policy, “we’re going to see some lenders scrambling to enforce these delinquent loans,” Davis Senseman, attorney and founder of the Minnesota-based law firm Davis, told the law firm.

“I hope the government can see that before we get to a point like we saw in 2008, 2009 where there’s just these really high default rates and these really high rates of loans being called,” Senseman said . “It’s hard to see where that would be good for the economy as a whole — for the country as a whole.”

Jason Milleisen, owner-operator of Distressed Loan Advisors, which advises small businesses with defaulted SBA loans, said arrears and defaults will likely hit in November or December.

The government is “not making any special concessions because of Covid,” he said. “They still see it the way they’ve always done it, which is: The size of the settlement should be directly related to the financial endowment of each guarantor, regardless of why they closed.”

Charges increase

The SBA said in a statement to Bloomberg Tax it does not foresee a wave of defaults. It said “no specific changes are planned at this time” to its deferral policy for its regular business lending programs.

“Although delinquencies have been historically low over the last 12 months due to the CARES 1112 payments and other government assistance, we currently see no indication of an impending decline in the portfolio’s performance,” the agency said.

But the agency’s visibility into these loans is minimal, said Ethan Smith, co-founder and managing partner at SBA-focused law firm Starfield & Smith, which represents some of the largest SBA lenders.

While lenders are required to update the SBA each month on the status of each loan, these are the most basic terms. The agency only knows whether a loan is in difficulty at an advanced stage.

Write-offs, a term bankers use to describe loans that are unlikely to be repaid, peaked in 2010 on 7(a) loans. Lenders liquidated about 2,100 loans in the first three quarters of fiscal 2021, compared with nearly 2,700 loans in the same period of fiscal 2020, agency data shows. Charge-offs usually follow charge-offs, and while there is currently a downtrend, it takes time to get going again.

Tony Wilkinson, president and CEO of a Texas-based trade group that represents federally-guaranteed lending institutions, said it’s too early to say if defaults on 7(a) loans will rise as sharply as they did after the 2008 financial crisis .

Few options

To avoid mass defaults, the agency could coordinate with Congress to codify, clarify and close loopholes — like encouraging deferred payments to extend beyond the expiry date — to allow lenders to sue in the SBA’s deferral policy, Didier said Trinh, director of policy and policy impact at the Main Street Alliance, a small business advocacy group.

“Although programs have obviously been launched quickly during COVID in an emergency situation, it is absolutely critical that the language is written with the right legislative intent so that the SBA can implement the law as it was intended,” he said. Referring to the deferred payment policy set out in the March 2020 Relief Act.

With home prices so high right now, business owners who post homes as collateral may be able to take equity out of their homes to pay off some loans, Milleisen said, noting the difference in home prices from the 2008 crisis to the pandemic crisis. On the other hand, banks may not be willing to negotiate better settlements if that’s an available option, he said.

Lenders may also be willing to extend loan terms or temporarily accept only interest payments, but when a bank enters into negotiations, it only delays the inevitable.

“A distressed borrower is likely to default on this restructuring just as easily as it did the first time, and they just don’t have the resources to fundamentally redraw those loans,” Milleisen said.

Declaring bankruptcy could be a way for some companies to retain assets, but the process could drag on for years.

Condron’s lender, Florida-based First Home Bank, eventually dropped the lawsuit “in the ordinary course of business,” according to a bank spokesman.

But Condron is still seriously considering bankruptcy if its last option, granting closed venues, falls through. Her original application was denied, but she appealed when the bank dropped her lawsuit – negating why she was disqualified in the first place.

Condron is not opening this Halloween season. The best-case scenario, she said, could be Christmas if the grant goes through. She’s currently stripping five floors of stuff that’s accumulated over a decade to move elsewhere.

“I just don’t want to file for bankruptcy,” Condron said. “I’ve been doing this for 11 years, I can’t just give up my life like that.”

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