The enactment of the Small Business Jobs Act on September 27, 2010 is welcome news for the entire SBA community.  Lenders and their customers are especially pleased with the extension of sections 501 and 502 of the American Recovery and Reinvestment Act of 2009 (the "Recovery Act") through December 31, 2010.  Section 501 of the Recovery Act subsidizes the payment of the SBA guaranty fee on 7(a) loans and 504 loans, which is typically a cost that is passed through to the borrower.  Section 502  of the Recovery Act provides a 90% guaranty for 7(a) loans, which is helps a lender's balance sheet and provides an increased incentive to lend to small businesses. Over the past year, the elimination of the SBA guaranty fee  and the increased guaranty percentage for 7(a) loans have been credited with playing a major role in "jump starting" growth in SBA lending in 2009, which continued through the first half of 2010.  The expiration of these provisions under the Recovery Act on May 31, 2010 caused many lenders and their customers to choose to wait out the summer hoping for the restoration of these provisions under the Recovery Act, while Congress debated and, for a period of time, tabled the Small Business Jobs Act.  As a result, most SBA lenders saw their volume of new SBA loans dip over the summer.

With the passage of the Small Business Jobs Act at the end of September 2010, the maximum loan amount for 7(a) and 504 loans is permanently increased to $5,000,000.00 (or in some cases for 504 loans to $5,500,000.00).  Making a $5,000,000.00 loan available, without a guaranty fee and with a 90% guaranty will certainly help small businesses gain access to much needed capital in the fourth quarter of 2010.  However, the question is what will happen when sections 501 and 502 of the Recovery Act expire in January 2011?

The newly released SOP 5010(5)(c) effective October 1, 2010 which sets forth the SBA guaranty fee formula employed by SBA, still reflects a maximum loan amount of $2,000,000.00.  However, 13 CFR 120.220 states that loans over $700,000 are to be subject to a guaranty fee which is 3.5% of the guaranteed portion up to $1,000,000, plus 3.75% of the guaranteed portion over $1,000,000.00.  The Small Business Jobs Act does not provide any new guidance on how the SBA guaranty fee should be calculated for loans at  the new maximum amount of $5,000,000.00.  Therefore, lenders must assume that the current formula applies going forward.   Assuming that the SBA would require a 3.5% fee on the first $1,000,000 of the 75% guaranteed portion ($3,750,000.00) and 3.75% on the next $2,750,000.00 of the guaranteed portion, the guaranty fee on a $5,000,000.00 loan would be $138,125.00!  It is questionable whether many small business owners would find it prudent or possible to pay such a high fee in order to obtain SBA financing, when conventional commercial loan origination fees tend to run between .50% to 2% of the loan amount.  For example, an origination fee of 2% on a $5,000,000.00 commercial loan would be equal to $100,000.00, therefore making  the SBA guaranty fee on the same size loan  almost 40% higher than a conventional origination fee.

Unless Congress and the SBA are proactive in addressing this new guaranty fee issue well in advance of December 31, 2011, it is possible that the momentum being created now under the Small Business Jobs Act will stop short in the new year.

For more questions on SBA Guaranty Fees or the Small Business Jobs Act, please contact Kim at 215-542-7070 or krayer@starfieldsmith.com.