The SBA and PROfound

Profound

pro·​found

difficult to fathom or understand

very great or significant

 

from Latin profundus, from pro- before + fundus bottom

 

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TIP OF THE WEEK

 

The most recent changes to SBA’s SOP are profound.

 

SBA SOP 50-10-8.1 will be effective October 1^st 2026.

 

Proficiency with SBA lending requires knowing SOP 50-10-8.

 

It has a prolix 147,517 words over 416 pages.    That’s an improvement over  the prior SOP 50-10-8 which had 163,291 words and 467 pages.

 

The biggest changes are focused on business acquisitions with increased debt service coverage requirements and how to amortized acquisitions that include both real estate and a business.

 

The guidance manual for SSBCI guarantees has only 6,742 words.    Only 22 pages.

 

 

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Indices:

PRIME RATE= 6.75%

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SBA 504 Loan Debenture Rate for August

 

For 20 year debentures, the debenture rate is only 5.08% but note rate is 5.15332% and the effective yield is 6.026%.

For 25 year debentures, the debenture rate is only 5.14% but note rate is 5.19340% and the effective yield is 6.033%.

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AHEAD OF THE YIELD CURVE

 

The prodigal son, the bond vigilantes, return.

 

Rates on the longer end of the yield curve continue to climb.

 

At last week’s $25 billion auction of 30-year Treasury bonds the high yield was awarded at 5.216 percent versus 5.058 percent a month ago.

 

This rate is a full ½ percent higher than it was at the beginning of the year.

 

This $25 billion offering was an increase compared to $22 billion the month prior.

 

The increased supply is causing prices to down causing the yields to go up. 

 

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table of data:

 

2001- 5.49

2002- 5.43

2003- ND

2004- ND

2005- ND

2006- 4.91

2007- 4.84

2008- 4.18

2009- 3.89

2010- 4.61

2011- 2.89

2012- 2.77

2013- 3.25

2014- 3.97

2015- 2.91

2016- 2.32

2017- 3.16

2018- 3.13

2019- 2.594

2020- 1.216

2021- 1.88

2022- 2.375

2023- 3.741

2024- 4.015

2025- 4.773

 

Wait a minute, why no numbers for 2003, 2004, and 2005?

 

One month after the 9/11 attacks, the Treasury 30 year bond is discontinued. When the Treasury mothballed the 30-year bond in 2001, experts speculated it was trying to drive down long-term interest rates, which had remained stubbornly high while the Federal Reserve was slashing short-term interest rates to revive the economy. When the Treasury discontinued the 30-year bond in 2001, its yield fell 35 basis points in one day. Why? A shrinking supply of the 30-year Treasury bond caused increased demand to drive rates down.

 

So what does all this mean?

 

I don’t know.  

 

The long end of the yield curve prognosticates inflationary expectations and ultimately market rate expectations.

 

 

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OFF BASE

 

We have now past the metrological midpoint of summer with only 38 days left until the first day of autumn.

 

 

SBA Loans Are Good for the Economy

The Bureau of Economic Analysis is scheduled to release the advance estimate for first quarter Gross Domestic Product (GDP)  on Wednesday, April 30th. 

Where will it be?

Here is what GDP has been doing and this week’s interesting little table of data:

4^th quarter 2013              3.2%

3^rd quarter 2013              4.1%

2nd quarter 2013             1.7%

1st quarter 2013              1.1

4th quarter 2012:             0.1%

3rd quarter 2012:             2.8%

2nd quarter 2012:          1.2%

1st quarter 2012:            3.7%

Contrast that with quarterly SBA 7(a) loan volume:

1^st quarter 2014                $4,106,960,000

4^th quarter 2013:             $3,989,696,000

3^rd quarter 2013:             $5,371,662,000

2^nd quarter 2013              $4,273,683,000

1^st quarter 2013               $4,049,146,000

4^TH quarter 2012             $4,173,790,000

3^rd quarter 2012              $4,359,166,000

2^nd quarter 2012              $4,039,042,000

1^st quarter 2012                 $3,443,723,000

Notice how third quarter growth in GDP had jumped over the prior period?  Same thing happened with SBA 7(a) loan volume.

SBA 7(a) loan volume then fell off to end the year.  That might trickle into the first quarter's GDP.

The correlation of SBA 7(a) loan approvals with our nation's economic performance appears to be quite strong.  Just for fun I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over six years using the Microsoft CORREL function. 

It came out to a statistically significant 0.86.

SBA 7(a) loans with variable rates

SBA 7(a) loans have variable rates tied to prime. Typically the rate can be up to prime plus 2.75%. It will usually adjust on a monthly or quarterly basis depending on the lender.

The idea of a variable rate may sound terrifying to some, but the prospects of increases in interest rates are far off. To get an idea of how long you can take advantage of the variable rate of a SBA 7(a) loan, you might want to go here:

When will the Fed raise rates?
by CalculatedRisk on 2/21/2011 05:08:00 PM
Short answer: it is very unlikely that the Fed will increase the Fed funds rate this year.

The earliest the Fed will raise rates? It could be later in 2012 or even later ...

Rates to remain low for an extended period

The Federal Reserve Open Market Committee once again said that economic conditions "likely to warrant exceptionally low levels for the federal funds rate for an extended period."

That means the savings from a variable rate SBA 7(a) loan should persist for some time.

Go here for the complete statement from the Federal Reserve.

The SBA and the Fed- Exceptionally low interest rates for an extended period

The Federal Open Market Committee said the other day that they will keep interest rates "exceptionally low" for an "extended period."

That means the variable rate of a SBA 7(a) loan offers an unique opportunity for borrowers that will persist for some time.

So how long is an "extended period?"

For that answer, you might want to check this out-http://idosbaloans.blogspot.com/2010/06/when-will-fed-raise-rates.html

Small-Business Index in U.S. Rises to Highest in Five Months

From Bloomberg:
Confidence among U.S. small businesses rose in October to the highest level in five months as more companies projected sales gains and an improving economy according to The National Federation of Independent Business’s optimism index.

For more of this go to: http://noir.bloomberg.com/apps/news?pid=20603037&sid=a1DC5_Vl5FYA

Ahead of the Yield Curve

Retailers appear to have cut down on shipments to avoid excess holiday inventories, an action that has sapped some of the strength from the economy, according to a new report released by Ceridian-UCLA Tuesday.

The Ceridian-UCLA Pulse of Commerce Index tracks up-to-the-minute diesel fuel purchases by commercial trucks.

Diesel purchases have come to be a good proxy for the state of commerce across the country. An increase in sales means more goods are being trucked and fewer diesel purchases suggest commerce is slowing.

Nationwide, the index fell 0.6% in October after declining 0.5% in September and 1% in August. That was the first three-month drop since January 2009, at the height of the recession.

This is usually a leading indicator of the Fed's report on capacity utilization which is also due out soon.

Based upon this information, it would seem that the savings from a low variable rate with a SBA 7(a) loan should persist for some time.

For more go here: http://www.ceridianindex.com/

The SBA and the Fed- Exceptionally low interest rates for an extended period

The Federal Open Market Committee said yesterday that they will keep interest rates "exceptionally low" for an "extended period."

That means the variable rate of a SBA 7(a) loan offers an unique opportunity for borrowers that will persist for some time.

So how long is an "extended period?"

For that answer, you might want to check this out-
http://idosbaloans.blogspot.com/2010/06/when-will-fed-raise-rates.html

Banks Keep Failing, No End in Sight

From today's Wall Street Journal:

http://online.wsj.com/article/SB10001424052748704760704575516272337762044.html?mod=WSJ_hpp_MIDDLTopStories

As more and more banks fail, more and more of them turn to SBA lending. The SBA hopes to see at least 1,000 new banks become SBA 7(a) lenders.

So far we have helped several small community banks set up and run their SBA departments.

The SBA and the Fed

The Federal Reserve Open Market Committee met today and they said that they will continue to keep interest rates low for an "extended period."

So how long is an extended period? For that answer go here-
http://idosbaloans.blogspot.com/2010/06/when-will-fed-raise-rates.html

For the text of the Fed's release go here-

http://www.federalreserve.gov/newsevents/press/monetary/20100921a.htm

Ahead of the yield curve

Good news abounds today.

The yield curve is getting even steeper.

Longer-term Treasuries fell, pushing the 30-year bond yield to a one-month high, as reports on Philadelphia manufacturing and U.S. initial jobless claims eased concern that the economic recovery is stalling.

The yield on the 30-year bond increased 8 basis points, or 0.08 percentage point, to 3.95 percent.

The SBA and the Fed- capacity utilization

Production in the U.S. cooled in August as automakers scaled back following a surge in output the prior month.

Industrial production increased 0.2 percent last month after rising 0.6 percent in July, figures from the Federal Reserve showed today. Manufacturing expanded 0.5 percent excluding autos, the most since May.

Capacity utilization, which measures the amount of a plant that is in use, increased to 74.7 percent last month. It was 74.6 percent in July. The gauge averaged 80 percent over the past 20 years, showing there’s enough spare plant equipment and space to prevent bottlenecks that would lead to higher prices.

For a copy of the complete release, go here- Industrial production and Capacity Utilization

What does this mean?

This is the highest level for industrial production since Oct 2008, but production is still 7.2% below the pre-recession levels at the end of 2007. Capacity utilization at 74.7% is still far below normal - and well below the the pre-recession levels of 81.2% in November 2007. The all-time low was 69.9% back in August of 2009. This was the lowest ever.

We aren't even half way out of the hole yet.

The SBA and the Fed

This could be a prelude to tomorrow's release on Industrial Production and Capacity Utilization from the Federal Reserve.

Press Release:
The Ceridian-UCLA Pulse of Commerce Index™ (PCI) by UCLA Anderson School of Management fell 1 percent in August.

This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce IndexTM

In July, the capacity utilization rate for total industry moved up to 74.8 percent, a rate 5.7 percentage points above the rate from a year earlier but 5.8 percentage points below its average from 1972 to 2009.

One of the Federal Reserve’s favorite gauges of the economy is the capacity utilization rate. The Federal Reserve watches capacity utilization rates to see if production constraints are threatening to cause inflationary pressures. Bottlenecks or shortages often lead to inflationary pressures that would drive prices even higher. Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

Should capacity utilization stall or even fall, it may prompt concern from the Federal Reserve when they meet in two weeks.

As a result, the interest rate savings from a low variable rate of interest available from a SBA 7(a) loan should persist for some time.

The SBA and small business optimism

From NFIB: Small Business Confidence Remains Low

The National Federation of Independent Business Index of Small Business Optimism gained 0.7 points in August*, rising to 88.8. Most of the improvement was accounted for by gains in expected real sales and expectations for business conditions six months out, the two components that lowered the index in July. But despite their improvements, both measures are still in recession territory. “Small business owners are expecting sub-par growth in the second half of 2010,” said Bill Dunkelberg, NFIB’s chief economist.

The SBA and the Fed

Today, the Federal Open Market Committee said that it will continue to keep interest rates “exceptionally” low for an "extended period."

The key language about rates stayed the same: "The Committee ... continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

EXCEPTIONALLY low interest rates for an EXTENDED period already exist with a 504 loan. Currently the effective yield on a 504 debenture is only 4.93% and this rate is fixed for twenty years.

On September 14th, the Small Business Lending Bill comes up for a vote in the Senate. Should the legislation pass, the exceptional benefits of 504 financing can be extended to refinance owner-user real estate debt.

For a copy of the Federal Reserve’s press release go here:
http://www.federalreserve.gov/newsevents/press/monetary/20100810a.htm

While the rate on a SBA 7(a) loan is typically variable and adjusts on a quarterly basis, it would appear that based upon the Fed statement today, rates are not going up any time soon.

The Fed has not raised the Fed Funds rate until unemployment drops significantly. Based on the the Fed's own forecasts of the unemployment rate and inflation, the Fed will probably not raise the Fed Funds rate until late 2011 at the earliest.

The SBA and ending the recession one employee at a time

Another 131,000 people lost their jobs in July according to the Department of Labor.

The Census Bureau said it let go about 144,000 of the people conducting the decennial population count from mid-June to mid-July. It still had about 200,000 temporary workers on staff as of July 17, indicating additional cuts to come that will keep distorting the payroll figures for months.

For that reason, economists say private payrolls will be a better gauge of the state of the labor market for much of 2010. Private payrolls that exclude government agencies rose by 71,000 last month, after a June gain of 31,000. Total employment fell a revised 221,000 in June.

According to Intuit, small businesses hired about 40,000 people last month. That means more jobs are being generating by small business than any other part of the economy.

That trend of small business hiring however has recently slowed. This slowdown coincides with the expiration of SBA loan Recovery ACT stimulus incentives such as an increased guarantee for lenders participating in the SBA 7(a) loan program. SBA 7(a) lending volume has also slowed since the expiration.

The SBA and ending the recession one employee at a time

This morning Intuit said small business employment grew slightly in July generating approximately 40,000 new jobs nationwide in July.

The Intuit Small Business Employment Index shows increasing employment since October 2009, reversing a downward trend that dates back to 2007.

For a complete copy of the report go here-

http://smallbusiness.intuit.com/blog/wp-content/uploads/intuitsmallbusinessemploymentindex_july2010.pdf

Are we headed to a double dip recession?

Are we headed to a double dip recession?

It sounds like it according to the Economic Cycle Research Institute.

Check this out-

http://www.dailyfinance.com/story/investing/double-dip-recession-one-reliable-measure-says-its-inevitable/19568906/

The SBA and ending the recession one employee at a time

It will be small business that leads us out of the recession, but not anytime soon.

Intuit Inc., which provides payroll services for small employers, says the nation's tiniest companies had fewer new hires last month than any time since October.

To calculate its estimate of national hiring, Intuit uses payroll information from its 56,000 small-business customers. The company defines small businesses as those with fewer than 20 employees. Intuit's data show that small businesses hired just 18,000 additional workers last month. That's still positive territory, but it's less than a third of the 60,000 that were added in February, when it seemed that an employment recovery was imminent. Additional hiring dropped steadily during the spring, to 40,000 in April and 32,000 in May. Another payroll company, Automatic Data Processing Inc., painted an even gloomier picture, saying that small businesses lost 1,000 jobs nationwide in June.

While correlation is not causation, the drop in small business hiring coincidences with the expiration of the SBA loan Recovery ACT stimulus measures. SBA loan volume has declined to a snail's pace.

When will the Fed raise rates?

Some think the Fed won't raise rates now until late 2011.

According to Calculated Risk, the Fed has not raised the Fed Funds rate until unemployment drops significantly. Based on the the Fed's own forecasts of the unemployment rate and inflation, the Fed will probably not raise the Fed Funds rate until late 2011 at the earliest.

Check it out at http://www.calculatedriskblog.com/2010/06/when-will-fed-raise-rates.html