Government Shutdown Stalls SBA Loans, Boosts Alternative Lenders

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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 Biz2Credit.com.

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.