Government Shutdown Stalls SBA Loans, Boosts Alternative Lenders

NEW YORK ( TheStreet) -- To small-business owners, a government shutdown means one thing -- a halt in Small Business Administration loan approvals.

Federally funded, the SBA is only operating essential functions, which includes SBA's disaster operations. However, loan guarantees under the SBA's largest 7(a) loan program, 504 certified development loans, procurement assistance, SCORE (the SBA's mentoring program), and a host of other services are halted for now.

The stalled SBA loan process will give a boost to alternative lending this quarter from firms which are already capitalizing on opportunity created by traditional lending gaps.

Access to capital is a sensitive issue to small-business owners, given that traditional loans all but dried up during the financial crisis. While banks have somewhat opened the funding spigots since then, a host of smaller alternative players have seen an opportunity within the financing industry to get capital to small businesses quicker and faster (even if they do have higher interest rates) creating competition to the traditional bank loan.

With Tuesday's government shutdown, it's one more nail in the coffin for small-business owners to look to alternative lenders for financing.

"It sends a very negative message to small business owners that you cannot depend on government programs," saidRohit Arora, CEO of

Also see: Business In Revenue Mode? You May Not Need a Bank Loan

Big bank lending reached an all-time high in August since before the recession, according to the latest Biz2Credit data. While September numbers are not out yet, small business bank lending is likely to fall in October, given the government shutdown.

The fourth quarter is typically the busiest quarter for bank lending, as businesses are planning for the new year and banks are looking to meet their targets, Arora said. Even if the government shuts down for just one week, it will create a three to four week backlog in SBA loan approvals, he said.

"It will become a nightmare with every bank trying to get their loans in the front of the queue," Arora said.

"Alternative lending has a great opportunity to cash in on this and a lot of businesses need money," Arora added.

Alternative lenders open for business

One likely beneficiary will be eBay's ( EBAY) PayPal. The San Jose-based company is testing a new loan program that it is making available to a portion of its business customers over the next three months that use the payments processor's services.

PayPal has approved about 90,000 U.S. businesses that can take advantage of PayPal Working Capital, a lending product whereby small businesses can get access to fast and easy cash to fund their operations. The company is in the process of contacting the select group to let those in the group know they are eligible for the product.

The program was launched last week. Businesses will be able to apply for a loan from through Dec. 31. The loans are issued through WebBank, based in Salt Lake City.

PayPal Working Capital is among the growing group of financing products that is linked to the seasonality of a business, particularly as businesses looking for capital to ramp up inventory and staff for the ever important holiday season.

Borrowers repay the loan through a portion of their daily sales processed through PayPal. If a business doesn't make any sales on a given day, no loan payment is taken out. There are no monthly interest rates (a flat fee is tacked onto the principal amount). There's also no minimum monthly payment (borrowers decide during the application process the percentage of daily sales they want taken out), PayPal said.

Merchants can apply online and will be prompted to choose their loan amount, which is typically up to 8% of the business's annual PayPal sales. Loans range from $1,000 to $20,000, PayPal said. The lender uses PayPal sales history to extend credit, so no personal or business credit check is required and the loan does not affect a business's credit score.

"Credit conditions in the small business market continue to remain tight even though commercial banks began easing lending conditions in mid-2010," a PayPal spokesperson said. "PayPal's smaller, online-focused businesses have often found traditional lending out of reach. PayPal aims to help fuel small business growth by introducing PayPal Working Capital.

PayPal's Web site said it has 132 million active accounts in 193 markets and 26 currencies around the world, processing more than 7.7 million payments every day. It expects to process $20 billion in mobile payments in 2013.

Last week, PayPal announced its intent to acquire payments platform Braintree for $800 million in cash.

-- Written by Laurie Kulikowski in New York.

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