Small Businesses’ $2 Billion Problem: Government Shutdown Leaves Loans in Limbo - TINNITUS-HYPERACUSIS
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Small Businesses’ $2 Billion Problem: Government Shutdown Leaves Loans in Limbo

Small Businesses’ $2 Billion Problem: Government Shutdown Leaves Loans in Limbo

Honey Meadows, owner of the Westside School, a child-care center in Atlanta, plans to use a $405,000 loan guaranteed by the SBA to make needed improvements and refinance roughly $275,000 in existing debt. With SBA approvals at a standstill, Ms. Meadows can’t build a wheelchair ramp, buy a van to transport children or add classrooms and teachers.

“It’s scary to think we have these plans, and they may be put on hold,” said Ms. Meadows, who currently cares for 38 children. The new loan she is seeking from the SBA will carry an interest rate of about 8.25% and a 25-year term, according to Immito, Ms. Meadows’s lender.

SBA loans are a mainstay for many entrepreneurs, who generally can borrow as much as $5 million to start, buy, expand or run a small business through the agency’s two biggest programs. While the SBA doesn’t directly fund small-business owners, it covers as much as 90% of loan losses, giving an incentive to banks and other financial institutions to finance businesses they might not otherwise serve.

Honey Meadows, owner of Westside School, can’t hire new teachers or add classrooms because she can’t get SBA financing due to the government shutdown. Photo: Dustin Chambers for The Wall Street Journal

Lenders say they are still taking loan applications and closing loans that have already received SBA approval. But it isn’t clear when borrowers like Ms. Meadows will get financing.

“About half the loans going through due diligence now aren’t going to be able to close before the government opens up,” said John Moshier, president of small business lending at Ready Capital Corp. , a licensed nonbank SBA lender in New Providence, N.J.

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The shutdown has already delayed about $2 billion in SBA lending, estimated Mark Zandi, chief economist at Moody’s Analytics. Mr. Zandi said the fallout would intensify quickly if the disruption continues into next month, which could undermine small-business confidence and make owners more cautious in their hiring and investment.

Economic optimism among small firms sank in January to its lowest levels since President Trump’s election, according to The Wall Street Journal-Vistage Small Business Confidence Index.

An SBA official said the agency is still processing loans under its 504 lending program, which helps small businesses buy real estate and equipment, that were approved and obligated before the Dec. 22 shutdown. The SBA doesn’t know how many loans are awaiting government approval because its application process is closed, he said. A handful of other SBA operations, including disaster assistance, are still running, the official added.

The SBA is “fully prepared to handle higher volume of loan requests to satisfy any unmet demand” once the government reopens, he said.

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Many borrowers face imminent deadlines. Thomas Matassa, owner of Bell Plaza Physical Therapy in Bayside, N.Y., is slated to close at the end of January on the purchase of a building that would allow him to expand his practice. He said he could lose a $150,000 deposit if the shutdown prevents him from securing the $1.45 million in SBA financing to complete the deal.

If the loan falls through, he added, “instead of being able to grow a business by buying the building, I am in the hole.”

Waterford Receptions, which operates reception halls in Springfield and Fair Oaks, Va., is seeking a $1.6 million SBA loan to refinance the balance of an existing loan that comes due Feb. 1 and to replace the 12-year-old carpeting at one of its two locations during the slower winter season.

“We can probably work out with our original bank a little bit of a delay. Weeks? Yes. Months? No,” said Keith Clark, chief executive of the 120-employee company. “We are just desperate to get new carpet.”

Honey Meadows spends time with a child at the Westside School. Photo: DUSTIN CHAMBERS FOR THE WALL STREET JOURNAL

The shutdown already has raised costs for some businesses. Samuel Means, owner of Hello Merch, a Phoenix-based company that creates and sells merchandise for bands and small companies, lost out on a $10,000 incentive fee because he wasn’t able to meet a Dec. 31 deadline for closing on the purchase of a historic building he had been eyeing for more than a year.

If the shutdown continues past Jan. 31, Mr. Means said, Hello Merch may have to look to other sources for the $954,000 he is seeking from the SBA to help cover the estimated $2.385 million in costs. Those options could include a short-term bridge loan or a higher-interest loan from a private-equity firm.

Michael Pearce, owner of the Wine House, a retail store and restaurant in Fairfax, Va., said he had to turn to a high-cost, short-term lender because he couldn’t get an SBA line of credit to carry his second location in nearby Leesburg through the slower winter months. Mr. Pearce had taken out an SBA loan this fall to open up the Leesburg location.

“ “To keep us alive, I am borrowing from business associates who have worked with us for years.” ”

Mr. Pearce said he would pay $23,000 in interest and fees in the next 15 months on the $50,000 he has borrowed. “Desperate times call for desperate measures,” he said. “I have to make payroll.”

It is typically difficult for borrowers with SBA loans to get additional financing from a bank or other source, said Michael Flynn, a spokesman for Eagle Bank, a unit of Eagle Bancorp Inc., Mr. Pearce’s lender. “Mr. Pearce is eligible to apply for an SBA-backed line of credit,” he added, “but it cannot be processed now because of the partial shutdown.”

Some existing lines of credit must be reissued and re-approved by the SBA. Jill Emerson, CEO of Paradoxe Corp., an exporter of electrical components based in Jackson, Tenn., found that out recently when the company’s lender shut down its $3 million credit line.

“Our frustration is unbelievable,” Ms. Emerson said. “To keep us alive, I am borrowing from business associates who have worked with us for years.”

—Lalita Clozel contributed to this article.

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Write to Ruth Simon at ruth.simon@wsj.com

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