As two prominent Westchester County financial firms indicated ongoing issues with the credit markets, the federal government expanded eligibility for a Small Business Administration program that guarantees bank loans.
Both Purchase-based MasterCard Worldwide Inc. and Armonk-based MBIA Inc. told investment analysts this month that they have yet to see a meaningful improvement in the credit markets, with many small businesses using MasterCard”™s credit and debit cards, and MBIA issuing bonds to municipalities to fund various projects.
For its part, MasterCard indicated that credit and debit card transactions were down 14 percent in the first quarter, and had yet to gain steam as of mid-April.
“I think what we are seeing is the reality in what is going on in the economy play through our numbers,” said Robert Selander, CEO of MasterCard, in a conference call in early May. “We are looking forward to obviously seeing the stimulus begin to have some impact later in the year and I think that is probably the earliest we will be able to tell you more about what is going to happen.”
With local banks filling the lending void created by larger national banks, the climate could improve further after the Small Business Administration expanded eligibility through September 2010 for its 7(a) program, which guarantees a substantial portion of loans made by banks to companies that might not be ordinarily able to secure credit.
Since reducing fees on its 7(a) loans in March and increasing the guarantee to 90 percent of the loan principal, the SBA said loan volume nationally is up by more than 25 percent.
The temporary 7(a) loan size standards allow businesses to qualify based on net worth and average income, similar to the standards for the agency”™s 504 Certified Development Company loan program. The net worth for the company and its affiliates cannot exceed $8.5 million and the average net income after federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years can”™t be more than $3 million.
The new rules allow 70,000 companies nationally to gain access to the program, according to SBA estimates, including many impacted by the auto industry crisis such as dealers and suppliers. The Washington, D.C.-based National Automobile Dealer Association praised the changes, saying it was a critical step to unlocking the frozen credit markets and giving thousands of dealers the liquidity needed to stay open and avert layoffs.
The new SBA rules, of course, will assist businesses across a range of industries, not just auto dealerships. While large percentages of banks nationally did not tighten loan terms generally for small businesses between the fourth quarter last year and the first quarter this year, that was not the case for riskier loans for the smallest companies, according to a survey published this month by the Board of Governors of the Federal Reserve System.
Two thirds of banks charged higher premiums on loans deemed riskier, the Fed found, with larger banks particularly loath to taking on such debt.
In the first quarter, 40 percent of banks nationally reported tightening their commercial lending standards, down from 65 percent of banks in the fourth quarter last year and the first time since January 2008 the figure dropped below 50 percent.
More than half of banks reduced the size of credit lines, however, as demand for all commercial loans continued to fall.
 “We”™re in the middle of the credit storm still,” said Jay Brown, CEO of MBIA. “We”™re kind of half way through this cycle.”
