Small businesses could find it easier to get government-backed loans following a decision by the Small Business Administration to let banks use either of two widely-used interest rate benchmarks — LIBOR and prime — as the base rate for calculating the interest rate charged on its loan products.
Larry Kneip, SBA director at Indus American Bank in Iselin, welcomed the SBA rule change. “I think SBA lenders will become more active, and it will help the economy tremendously.”
SBA lending declined 30 percent in the fiscal year ended Sept. 30, in part because lenders were required to price the loans off prime at time when LIBOR was rising to unusually high levels, said James Kocsi, SBA New Jersey district director. The prime rate is now 4 percent, and banks can tack on an additional 2.75 percent, for a total of 6.75 percent for SBA loans longer than seven years; for loans seven years and shorter, the maximum was prime plus 2.25 percent, or 6.25 percent.
But banks borrow money from each other at LIBOR, short for London interbank offered rate. Historically, LIBOR has been 3 percentage points lower than prime, but in recent weeks, the global liquidity crisis drove LIBOR to nearly the level of the prime rate, Kocsi said, giving banks a narrower spread between their own cost of funds and the rates they charge on SBA loans; LIBOR has since fallen back to more normal levels.
Competition with higher-yielding assets also meant banks earned a lower premium when selling their prime-based SBA loans in the secondary market. Activity in the secondary market slowed, leading some banks to cut back on SBA loan origination, Kocsi said.
The rule change “should allow our banks to be more willing to lend to small business,” Kocsi said. At today’s rates, a bank can charge up to 6.75 percent on an SBA loan tied to prime, but up to 8.33 percent for the same loan tied to LIBOR, Kocsi said. The bank starts with LIBOR, which today stands at about 2.58 percent, then adds 3 percent to get a base rate of 5.58 percent, then adds 2.75 percent for a maximum rate of 8.33 percent.
Source:http://www.njbiz.com/article.asp?aID=76630
