Since 1953, the Small Business Administration has delivered about 20 million
loans, loan guarantees and other forms
of assistance to small businesses across the
country. The government-sponsored program not only helps small businesses when
they are starting out but also helps more
mature companies find funding to continue
to grow.
“The biggest benefits are lower down payments and a longer payment stream,” says
John Guy, senior vice president for small
business administration and alternative
lending at Fifth Third Bank. “The program
does allow banks to lend to companies that
they may not on traditional guidelines.”
Smart Business spoke with Guy about the
SBA’s different programs, how to take
advantage of those and how the tough economy has affected the SBA program.
How are SBA loans different?
The SBA program was created to help
companies who may not qualify for conventional financing. It covers a broader range of
stages in a company’s life, from start-up to
mature companies. The government created
this program to encourage lenders to loan
money to these companies, and the inducement is to provide a guarantee for, depending on which program it is, a portion of those
loans to mitigate a loss to the bank.
What kinds of programs are available?
The major program is the 7A. Under the 7A
we’re able to lend up to $2 million, the government guarantees about 75 percent of that
loan, and it enables people to use the funds
for the widest range of opportunities — purchasing real estate, working capital, equipment financing, etc. Borrowers are able to
put less down than they would on a conventional basis. By comparison, for most commercial loans, banks want you to put about
20 percent down. For an SBA loan it’s 10 percent. Depending on the asset you’re going to
finance, you’ll get longer terms for an SBA
loan. For real estate transactions, conventional terms are likely to be 10, maybe 15
years; with an SBA loan, a 25-year term is
pretty standard.
The SBA also has an Express program,which is for secured and unsecured transactions under $350,000. This program is geared
to enable banks to meet the needs of smaller companies. The SBA Express program
has a guarantee of 50 percent.
The final program is the 504 program. It is a
long-term financing tool for economic development within a community. To qualify for a
504 loan, a business must demonstrate that it
is creating or retaining a job or jobs based
upon the size of the company. Generally, the
test is one job for every $50,000 provided by
the SBA. For ‘small manufacturers’ the criteria may be one job created or retained for
every $100,000. The funds provided for a 504
must be used for fixed asset projects such as
purchasing land and improvements, including existing buildings, construction of new
facilities or long-term machinery or equipment. This program however is more restrictive than the 7(a) program because proceeds
can not be used for working capital, inventory, consolidating or refinancing debt. The 504
program is different in its structure as well.
Typically, financing has a bank involved,
which provides up to 50 percent of the
financing. It has a nonprofit Certified
Development Company (CDC), which uses government guaranteed debentures to fund
40 percent of the transaction, and then the
borrower will put in about 10 percent.
What is involved in the application process?
It is a more paper intensive transaction. A
good lender with a motivated borrower can
close an SBA loan within the same time
frame as it could do a conventional loan. In
many instances, it depends on how motivated the borrower is in terms of providing
information. There is more information, and
a lot of that extra paperwork is on the
lender’s part. The most important things that
borrowers need to be able to do is show how
they plan to use the money and their ability
to repay it. They must also provide a business plan, tax returns, a bio of the principals
involved, a description of the business and
the legal documents that substantiate that
they are a business.
What types of problems might you face when
applying for an SBA loan in this economy?
Normally, when economic times are
tighter, more people use the SBA program,
even those who can qualify for conventional
lending, because the terms are usually a little
more flexible. It enables, in most instances,
borrowers to put less money down, which
means they have more capital available to
invest in their business.
Due to the current economic environment,
banks have tightened their credit requirements; they’re asking for larger down payments, stronger cash flow coverage, better
business plans and more experience in the
relevant business or industry. There are also
fewer SBA lenders today, especially non-bank lenders.
Borrowers need to explore several options to find that particular institution for
the kind of business that they have. We suggest people start with the bank that they’re
used to operating with. That bank has the
advantage of knowing something about the
customer, maybe the history of the business
if it already exists, so that will give you a
leg up.
JOHN GUY is a senior vice president for small business administration and alternative lending for Fifth Third Bank. Reach him at
(513) 534-7108 or [email protected].
