U.S. Small Business Administration Presentation to SEC Forum - - PDF document

1

U.S. Small Business Administration Presentation to SEC Forum

November 2009

2 Themes

• Small businesses represent one of the

largest segments of the U.S. economy and employment.

• Small businesses drive significant job

creation and economic growth.

• Small businesses play a critical role in

innovation and will drive the creation of 21st century jobs.

• Small businesses reflect the diversity of
• ur nation, helping to ensure that all

Americans have a path toward economic prosperity.

• In the two most recent recessions, small

businesses led the economic recovery and fostered continued growth. Supporting Facts

• Firms with fewer than 500 employees represent 99.7% of all employer firms
• They employ just over half of all private sector employees
• These firms pay 44% of total U.S. private sector payroll and create more

than half of non-farm private GDP

• Firms with fewer than 500 employees have accounted for 14.5 million net

new jobs between 1993 and the third quarter of 2008

• Small businesses hire 40 percent of high tech workers (such as scientists,

engineers, and computer programmers).

• SBA’s Office of Advocacy study shows that small firms produce 13 times

more patents per employee than large firms.

• Of the 23 million nonfarm businesses in 2002 (latest available data), women
• wned 6.5 million businesses generating $940.8 billion in revenues.
• Racial and ethnic minorities owned 4.1 million firms that generated $694

billion in revenues.

• Small businesses accounted for a significant share of job creation and

retention.

• In the recovery period following the economic recession of 2001, small

businesses drove positive employment gains one to two quarters before larger businesses did.

Small Business Plays a Significant Role in the Economy

The small business credit market is still challenged, as tightened standards have yet to ease for conventional small business lending, despite some stabilization since previous quarters. Credit standards continue to be affected by reduced tolerance for risk and a more uncertain economic outlook. A significant driver of reduced C&I lending has been decreased activity in revolving lines of credit, illustrating the market gap in working capital.

• 16% of loan officers still report tightening standards for small

firms (vs. 36% in last survey)

• A smaller share of loan officers report tightening, while the majority (84%) say standards remain basically unchanged
• This quarter marks the 8th consecutive quarter of reported tightening at double‐digit percentage levels
• 0% of loan officers reported loosening of standards
• Why are banks tightening standards?

Banks report the following as important factors:

• 78% claim reduced tolerance for risk
• 74% claim less favorable or more uncertain economic outlook
• Less than 20% claim deterioration in capital position, and less than 7% claim deterioration in liquidity position
• Why has C&I lending decreased?

Banks report the following as important factors:

• 89% report decreased originations of term loans
• 87% report decreased draws on revolving lines of credit, potentially reflecting the gap in working capital; and 70%

report increased pay downs on other draws of revolving credit lines

• 45% of officers report weaker demand from small firms (vs. 60% in last survey)
• Demand is decreasing potentially because of decreased investment

in plant/equipment and decreased inventories/AR/M&A activity

• Small businesses still report decreased and costlier lines of credit:
• 15% say the size of credit lines is still decreasing—while the majority say lines have remained unchanged
• 38% report the cost of credit line is still worsening

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How Small Businesses Are Affected by the Economic Downturn: Access to Credit

Percent of Bank Loan Officers who report how credit standards have changed for small business firms over past three months

Source: Quarterly Federal Reserve Senior Loan Officer Survey, October 2009

Small business credit market is still challenged, as tightened credit standards have yet to ease

Tightened standards demonstrates the importance of increased guaranties to address risk aversion & increase access to capital 4

• After increased

tightening for two years, the majority of Bank Senior Loan Officers (84%) report stabilization in credit standards in FY Q4 2009

• Yet, there is still

minimal sign of easing credit standards

7.1 3.8 9.6 9.6 30.4 51.8 65.3 74.5 69.2 42.3 35.8 16.1 91.1 94.2 88.5 90.4 69.6 48.2 34.6 25.5 30.8 57.7 62.3 83.9 1.8 1.9 1.9 1.9 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Eased Considerably

• r Somewhat

Remained Basically Unchanged Tightened Considerably

• r Somewhat

Small businesses rely on credit cards for a significant portion of their debt…

Percent of overall debt/financing comprised of credit card debt

…and pay much higher interest rates on these cards (than alternate credit products).

• Approx. interest rate charged to SBs
• n primary credit cards

The vast majority report that terms have worsened in the past five years…

Change in SB credit card terms in past 5 years

…and the problems have gotten more severe in the last year

Source: National Small Business Association's Survey on Small Business Credit Card Lending, 2009

• 63% reported interest rate increased
• 41% reported credit limit reduced
• 25% reported a switch from fixed to variable

interest rate

• While credit cards have been widely used (or
• verused) by small businesses, they are likely not a

sustainable form of financing

• This trend highlights the need for more working

capital solutions

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How Small Businesses Are Affected by the Economic Downturn: Non-Traditional Credit

34% 10% 23% 15% 18% 0% 10% 20% 30% 40% 25% or more 11% to 24% 5% to 10% 1% to 4% None

20.0% 28.0% 31.0% 13.0% 8.0% 0.0% 10.0% 20.0% 30.0% 40.0% 20% or more 15% to 19% 10% to 14% 5% to 9% Less than 5% 79% 18% 3% Gotten worse Improved Not sure

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Impact of the Recovery Act

• In October 2008, credit markets, including SBA’s, froze, and the SBA secondary market slowed dramatically.
• On March 16, SBA implemented two critical Recovery Act provisions:
• 90% guarantees on 7(a) loans, and
• Fee reductions in both the 7(a) and 504 programs.
• These provisions have helped drive significantly improved loan volumes from the depths of the crisis.
• Expanded access to capital: : As of October 30, SBA approved1 $10.2 billion in Recovery loans, and supported $13.9

billion in lending to small businesses2.

• New lenders: From Feb. 17 to September 30, over 1,260 lenders that had not previously made a loan since Oct. 2008

made 7(a) or ARC loans. As of October 30, there were over 840 who had not made a loan since at least 2007.

• Recovered volumes: Since the signing of ARRA, weekly loan dollar volumes have risen 76% in the 7(a) and 504 programs,

compared to the weeks preceding ARRA’s passage3. September 2009’s gross 7(a) and 504 approval volume was SBA’s highest loan volume since August 2007

• Broad-based support: A significant share of loans supported by Recovery Act funding has gone to rural (27%), minority-
• wned (20%), women-owned (19%), and veteran-owned (9%) businesses4
• SBA has implemented the ARC loan program: As of November 1, SBA approved 3,767 loans totaling over $122 million5.
• The secondary market has also recovered.
• Improved secondary market volume: Over the past five months (May – October), the average monthly loan volume

settled from lenders to broker-dealers in the 7(a) secondary market has been $344 million and $322 million settled in October 2009

• Recovering premiums: . In October, 83% of the loans settled, representing 76% of total dollars, were sold at or above

premiums of 106 – a return to 2007 premium levels. By comparison, in January and February, zero loans sold at premiums above 106.

1 This is the total gross loan value approved since February 17. Typically, due to cancellations and loan size reductions, 15 – 20% of gross approval value does not get disbursed. 2 Includes estimate of 504 third-party first mortgages (calculated as 125% of SBA 504 debenture portion due to typical 50/40 split between third-party and SBA portion of 504 loan) 3 Compares average weekly gross approvals in the 7 weeks prior to Recovery Act to the average weekly gross approvals since the Recovery Act was signed. Normalized for market holidays as

well as disruptions caused by Washington, DC water outage (August 7, 2009).

4 Demographic data is self-reported. 5 See Footnote 1.

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Monthly 7(a) and 504 Loan Volume: FY2007 – 2010

NOTE: All loan volumes are gross loan value approved. Typically, due to cancellations and loan size reductions, 15 – 20% of gross approval value does not get disbursed.

• October 2009’s gross 7(a) and 504 approval volume was:
• 31 percent above the monthly average for FY 2009
• 4 percent below the monthly average for FY 2008
• Uptick partially driven by increased ongoing annual 504 borrower fees starting in October 2009 (from 0 bps to 38.9 bps)
• FY 2009 loan dollar volumes were 27% lower than FY 2008 loan volume

8/07 $1.94 B 9/09 $1.92 B 10/09 $1.44 B FY07 Average $1.72 B FY08 Average $1.50 B Pre‐ARRA Average $0.83 B FY09 Average $1,093,373 Post‐ARRA Average $1.30 B $0 M $500 M $1,000 M $1,500 M $2,000 M $2,500 M

Monthly Gross 7(a) and 504 Loan Approvals

9/2009 $399 M Monthly Avg. to 9/2008: $328M

• 50

100 150 200 250 300 350 400 450 500 1/2008 2/2008 3/2008 4/2008 5/2008 6/2008 7/2008 8/2008 9/2008 10/2008 11/2008 12/2008 1/2009 2/2009 3/2009 4/2009 5/2009 6/2009 7/2009 8/2009 9/2009

7(a) Secondary Market Settled Value

$ Million

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Volume Pricing

Recovery Continuing: Over the past five months, the average monthly loan volume settled from lenders to broker-dealers in the 7(a) secondary market has been $348 million, which is above pre-recession averages. In September 2009, $399 million settled in this market, the highest level since July 2008. Premiums Recovering: Premiums have begun to recover in the 7(a) secondary market, and for the past 2 months have been at 2007 levels. Pricing Improving: In September, 82% of the loans settled, representing 75% of the total dollars, were sold at or above premiums of 106. By comparison, in January and February, zero loans sold at premiums at or above 106.

Monthly Secondary Market Metrics: September 30, 2009

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 103 or below 103-106 106 or above

7(a) Secondary Market Premium Ranges