The government shutdown is throwing a wrench into efforts by some small businesses to get government-backed loans from the U.S. Small Business Administration.
Lenders said they continue to process and submit loans to the SBA, but borrowers will have to wait for approvals. Other borrowers are facing shutdown-related paperwork snafus that are slowing loan fundings.Michael F. McElroy for The Wall Street Journal Don Kelly, owner of Midwest Curtainwalls in Cleveland, was able to gain SBA approval for a $1 million line of credit before the shutdown.
Charlotte Calmels has been planning to use a $150,000 SBA loan to open her second French restaurant in Philadelphia, next month. But before the loan can close, her lender, Susquehanna Bank, in Lititz, Pa., must confirm her legal immigration status, a process that begins by contacting the SBA. The federal immigration agency, which remains open, stopped receiving requests from SBA officials to verify borrowers' immigration status last Tuesday, according to a spokesman.
While Susquehanna is looking for a way around the problem, Ms. Calmels worries that the mid-October closing could be delayed. "I have the keys to the restaurant," she said. "But that could prevent me from opening and hiring any employees."
Rohit Arora, the chief executive of Biz2Credit, a New York small-business lending broker, said he fears many business owners who rely on government-backed loans for working capital will turn to alternative lenders, such as merchant cash advances, which charge interest rates of up to 100% with short terms of just six to eight months.
Interest rates for the agency's flagship loans can range from 5.5% to 6.5%, compared with up to 8% charged by traditional banks for nongovernment-backed loans, Mr. Arora said, though for many borrowers, the value of the government guarantee is that banks are willing to deal with them at all, he said.
Even if the government gets back to work this week, the SBA will face a backlog that could delay some loan approvals by six weeks or longer, compared with a normal wait time of about two weeks, said Lynn Ozer, president of SBA/government guaranteed lending at Susquehanna. The biggest waits are likely to be for loans that have to go through the standard approval process, either because they weren't made by a "preferred lender" that can unilaterally underwrite loans or require SBA approval to waive a specific loan requirement, she said. Under the standard process, banks and other lenders must submit loans to the SBA for review and approval before they can be funded.
Ishwar Chauhan, co-owner of AptaPharma Inc. in Pennsauken, N.J., a specialty pharmaceutical company, hopes to close on a $2.5 million SBA loan that would allow him to hire more employees for the 22-worker firm and buy additional equipment. But the application is on hold during the government shutdown because the SBA needs to approve a modification to the loan agreement before the loan is funded. "This is a new business," he said. "Every day is important to us."
An SBA official wasn't available to comment.
SBA officials have indicated that banks may be able to refinance certain loans they made during the shutdown into loans with SBA guarantees after the government reopens, said Tony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, a trade group. But that process is "problematic and expensive," he said, noting that borrowers will have to go through two closings, and lenders aren't certain the SBA will guarantee the loans.
On a typical day, the SBA approves about 250 loans totaling roughly $93 million, Mr. Wilkinson said.
Banks and other SBA lenders had scrambled to register approved loans ahead of the shutdown to insure the funds would receive federal backing before the agency closed its doors.
Don Kelly, the owner of Midwest Curtainwalls in Cleveland, was among those who squeezed in under the deadline. On the Friday before the Oct. 1 shutdown, Mr. Kelly received SBA approval for a $1 million line of credit for his company, which employs 50 people and makes the exterior walls for high-rise buildings. "We got in, in the nick of time," Mr. Kelly said, who recently secured two large contracts. He plans to use the SBA credit line to cover the gap between when he pays vendors and consulting engineers and when he receives payment from clients.
Finding alternative sources of funding could be tricky for borrowers who missed the cutoff.
"If we have someone we've qualified for an SBA loan product, generally speaking, that is going to be the best solutions for them," said Maria Coyne, an executive vice president at Cleveland-based KeyCorp, Mr. Kelly's lender. While the bank will help customers look for alternatives, "it's going to be hard for them to qualify conventionally," she said.
In a 36-page contingency plan, which was posted on its website last week, the SBA said it would close all major lending programs for small businesses indefinitely and furlough 408 of the 586 employees in its Office of Capital Access, which oversees the agency's lending programs for small businesses.
Eugene Simor, a 50-year-old brewer in San Antonio, said he worked with his local banker to finalize a $5 million SBA-backed loan to build an 18,000-square-foot brewery, ahead of last week's shutdown. In the rush, Mr. Simor neglected to consider the federal permits needed to operate the brewery. The agency that handles the permits, the Alcohol and Tobacco Tax and Trade Bureau, also closed its doors last Tuesday.
Some banks said they would try to take advantage of the refinancing option. "We will absolutely provide interim funding to the full extent the SBA allows," said Robert Polito, a senior vice president in charge of government guaranteed lending at Webster Financial Corp.'s Webster Bank in Waterbury, Conn.
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