WASHINGTON (Blue MauMau) – Small Business Administration loans have been shriveling up, and not just of late. SBA 7(a) loans have plummeted from 2005’s $15.4 million down to $12.8 in 2008, with the trend accelerating during the present credit crunch. Through early January in this fiscal year that began October 1, 2008 for the SBA, 7(a) loans plummeted 56 percent compared to the same period in the prior year.

What’s going on?

According to an industry expert, one reason is that small business demand for SBA loans has evaporated.

Mark J. Weiss, CEO of LeaseWise, LLC, a provider of small business funding solutions, states, “People are afraid to invest in new businesses. They’re taking a wait and see attitude while watching other businesses close up.” Perhaps, he feels, investors would rather sit on the funds they still have, in case they need a personal reserve for other purposes. Perhaps the impact on their 401K is making them feel less secure. With housing values crashing, the collateral value to support loan requests isn’t what it used to be.

But there’s an even bigger problem besides skittish business buyers. “Many lenders have pulled out of SBA lending altogether — whether it’s secondary market issues or risk management, the result is the same,” adds Weiss.

Chris Hurn, chief executive officer of Mercantile Commercial Capital, a lending institute specializing in SBA 504 real estate and equipment loans, agrees. “SBA loans normally take off in a recession, but this time around SBA lending has not taken off, mainly because of other issues relating to banks which are outside the SBA’s realm.”

Franchising Usually Takes Off in a Recession, but Not This Time

According to Hurn, when the U.S. economy hits a downturn, franchising usually accelerates because people who lose jobs look for a new means of livelihood, such as starting a business. Many don’t want to start their business from scratch and find franchising more appealing. Quite often they have money, such as from a 401k, which can be used to finance a franchise. Says Chris, “You would think that franchising would be taking off.”

But it isn’t. Chris thinks one of the major causes of the slide was a glut by big banks and lenders in the SBA Express program, a type of 7(a) loan that is a line of credit with the convenience of being on credit cards. There was a boom in these loans that were extended through business credit cards. That boom was followed by the continuing credit bust.

Explains Chris, “All these were credit card applications for business customers. For example, in conjunction with office supply stores, you’d go in as a business customer and you’d be approved for a credit card. Lenders would issue a credit card with a 50% express loan guarantee on the card. Banks flooded the marketplace with this stuff from ’03 through ’05. Then they radically retrenched. That’s part of what is being seen in the numbers.”

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