SBA Loans Plummet

The shaky economy is reducing demand for government-backed small business loans, the agency reports.

Following a record high in 2007, the number of government-backed loans  for small businesses fell by 30 percent this year as owners struggled with tighter credit and a shaky economy, the Small Business Administration reported this week.

This year, the agency guaranteed about 70,000 loans to small-business owners from commercial banks and lenders, down from 100,000 in 2007. The total value of loans fell 13 percent to $17.96 billion, while average loan size rose by $41,000 to $183,000.

Most of the loans were taken out under the agency's 7(a) and 504 loan programs, its two key lending initiatives.

The declines began at the end of last year and dropped off sharply by October, which marks the end of the 2008 fiscal year.

The SBA blamed the declines on a "perfect storm" of tighter credit conditions, declining credit worthiness, and reduced demand from owners worried about borrowing in an uncertain climate.

By offering larger loans to fewer owners, the agency said a higher amount of capital was being injected into more sustainable and successful businesses.

According to SBA Acting Administrator Sandy Baruah, government efforts to ease the impact of the financial market crisis will help "unclog the pipes" of the credit system and increase liquidity for smaller businesses.

Among other measures, the recently enacted $700 billion rescue plan  authorizes the Federal Deposit Insurance Corporation to expand insurance coverage to non-interest bearing accounts typically used by small businesses to cover payroll, inventory, and other operating costs. By unfreezing the commercial paper market, the Federal Reserve will also seek to restore short-term financing for banks and businesses.

"All these efforts will need time to fully work their way through the economic system," Baruah said in a statement.

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