Feds Launch Credit Line for Small Businesses

The Small Business Administration (SBA) is launching a line of credit program that gives small businesses up-front access to capital and more room to borrow. Biz owners can use all the help they can get as more banks are tightening credit limits this year.

The 7(a) Working Capital Pilot (WCP) is a flexible line of credit program that will allow small businesses to borrow up to $5 million. Loans are guaranteed 50/50 by 7(a) banks and other lending institutions and SBA.

Businesses will need to pay an annual fee and an additional annual 3% to 6.5% interest on top of the prime rate to access WCP funds. Biz owners can borrow against assets or obtain transaction-based loans to fund business needs. The WCP program is set to launch later this year.

“An ongoing challenge for small businesses who are trying to go after that contract, perhaps to help us rebuild infrastructure … or a manufacturing facility that’s trying to expand its orders, is being able to have working capital to deliver against that,” SBA administrator Isabel Casillas Guzman told CNBC. “This product is our aim to increase access to a simpler working capital line.”

More Banks Tighten Credit Standards

The banks aren’t done tightening lending standards to avoid taking on more bad debt. In the first quarter of 2024, 20% of small banks and 16% of large and medium banks tightened their credit standards, according to the Kobeissi Letter. The banks’ current squeeze, starting in Q2 2022, is the 2nd longest tightening since the 2008 financial crash.

Reason: Banks are holding roughly $6 trillion of commercial real estate (CRE) debt. Regional banks are carrying the highest percentage of toxic real estate debt on their balance sheets. CRE debt is set to balloon as loans mature due to higher interest rates. (Banks report the changes they make to commercial and industrial loan terms to the Federal Reserve.)

Moody’s Analytics expects the value of CRE to drop 26% by year’s end. Nationwide on average, one in five offices are currently vacant. Cities like San Francisco and Chicago are among the worst “ghost towns” struggling to bring workers back to town.