11/26/2008

WASHINGTON—The Small Business Administration hopes to encourage lenders to resume making 7(a) business loans by letting them charge higher interest rates.

Previously, lenders typically based the interest rates on their government-guaranteed 7(a) loans on the prime rate. Recently, however, the London Interbank Offer Rate — which lenders often must pay to obtain capital — has matched or even exceeded the prime rate. As a result, SBA lending has become unprofitable for many lenders.

This is one reason 7(a) lending — an important source of long-term financing for small businesses — has declined dramatically. In October, for example, the number of 7(a) loans was down 58 percent compared with October 2007.

To address this problem, the SBA will allow lenders to use Libor as the base rate for pricing 7(a) loans.

Source: http://www.bizjournals.com/phoenix/stories