On March 16, 2009, President Obama and Treasury Secretary Geithner announced several new initiatives that will benefit small businesses as part of the American Recovery and Revitalization Act of 2009 (the Recovery Act), which was signed into law on February 17, 2009. Initiatives include plans to increase the availability of loans for small businesses guaranteed by the Small Business Administration (SBA) and plans to relieve small businesses from several tax burdens.
Many of the benefits to small businesses come in the form of changes in the 7(a) and 504 SBA loan programs. The 7(a) program is the SBA's most basic and most used loan program. There are actually a number of specific lender programs within the broader 7(a) category, but the basic characteristics of each program are the same: commercial lenders provide loans to small businesses on terms that satisfy certain SBA criteria, and in turn the SBA issues a guarantee to the lender for a certain portion of the loan, typically capped at 75%-85%. In addition to loans, some of the 7(a) programs provide for guarantees on lines of credit, too.
The 504 program makes funds available to growing businesses for expenditures on fixed assets, such as purchasing real estate and buildings or renovating and modernizing existing structures, with the ultimate focus on community development. Under the 504 program, a nonprofit corporation certified by the SBA, known as a Community Development Corporation (CDC), takes a junior lien on the project for 40% of the project cost. The remainder of the project is financed by a senior lien to be held by a private lender for 50% of the cost, along with a 10% contribution from the business being assisted. The CDC's junior lien is then 100% guaranteed by the SBA. Businesses qualifying for 504 loans are subject to conditions relating to the size of the business and fulfillment of specified job creation or public policy goals.
Pledge to purchase SBA guaranteed loans.
Traditionally, banks have been able to sell their SBA-backed loans on the secondary market. However, the economic downturn has negatively affected the secondary market for SBA-backed loans. Banks are increasingly unwilling to originate new SBA loans because they cannot sell the SBA loans already on their balance sheets. Under the plan announced by Secretary Geithner, the government will spend $15 billion to buy up stagnant SBA loans and to purchase newly issued SBA loans originated by banks, with the goal of increasing the willingness of banks to originate new SBA loans by ensuring the viability of a secondary market.
Increase in SBA guarantee amounts.
When a bank makes 7(a) loans, the SBA typically guarantees 85% of loans up to $150,000 and up to 75% for larger loans. Under the new program, banks issuing 7(a) loans can receive up to a 90% guarantee on loans originated after March 16, 2009, subject to a $1.5 million cap in the guarantee amount. The 90% guarantee also applies to lines of credit opened through the Capline or Patriot Express 7(a) programs after March 16, 2009.
Temporary elimination of SBA lender fees.
Lenders are typically charged fees for originating SBA loans or lines of credit. These fees are customarily passed on to the borrowers. These up-front fees can be as large as 3.75% of the principal amount of the loan. Under the new program, the up-front fees for 7(a) and 504 loans or lines of credit are temporarily eliminated. Borrowers who obtained loans or lines of credit after February 17, 2009, can receive a rebate for up-front fees that they already paid.
Creation of the ARC stabilization loan program.
Under the Recovery Act, the SBA is creating America's Recovery Capital loan program (ARC) for the purpose of assisting small businesses with payments on existing debt. The program will provide up to $35,000 for small businesses to help make payments on existing qualifying loans for up to six months. Repayment of the ARC loan itself begins a year after its disbursement. The SBA is in the process of structuring and implementing this new program.
Tax relief for small businesses.
The Recovery Act provides several forms of tax relief for small businesses, including:
- Allowing businesses with gross receipts of up to $15 million to "carry back" their losses for up to five years, effectively resulting in a rebate on taxes paid in previous years.
- Allowing small businesses to immediately write off up to $250,000 of plant and equipment investment in 2009.
- Reducing estimated taxes paid by individuals with qualified small business income from a level of 100% of the prior year's tax liability (110% if the adjusted gross income in the previous year exceeded $150,000) to 90% of the prior year's tax liability.
- Extending Bonus Depreciation through 2009, allowing a larger depreciation in the first year after certain asset purchases.
- Excluding from taxation 75% of capital gains for investors in small businesses, provided that the investors hold the investment for at least five years.