Small Business Administration (SBA) loans are particularly popular in challenging economic times, when traditional lenders are less willing to provide funding. Program changes, including increasing the maximum loan size from $2 million to $5 million, are attracting more businesses. In the fiscal year ending Sept. 30, 2012, the SBA approved 39,442 loans for a total of $15.25 billion, and in the first nine months of fiscal year 2013 the SBA has approved 39,063 loans for $16.25 billion.
“In down times, the SBA programs become more important and fill a vital need for small businesses,” says Raymond Monahan, senior vice president and group manager of SBA Lending at Bridge Bank.
Smart Business spoke with Monahan about the types of SBA loans that are available and recent changes to the program.
What types of SBA loans are available?
The 7(a) is most commonly used; 75 percent of the loan is guaranteed by the government and money can be used for working capital, inventory, equipment, debt repayment (in certain instances) or real estate.
The 504 loan program is less well known. It’s more structured and is generally for real estate acquisitions. A borrower typically provides 10 percent down; a real estate mortgage pays 50 percent of the project cost; and the SBA guarantees a debenture for the remaining 40 percent through a Certified Development Company (CDC).
What are the benefits to SBA loans versus traditional loans?
The most obvious advantage is that there is a guarantee backing the loan. It’s also easier to qualify. Some businesses that are new, don’t have a certain profit level or don’t have the necessary down payment for traditional financing can get an SBA loan. Generally, you may need only a 10 percent down payment, whereas a bank will want 25 to 30 percent down if you’re buying real estate.
Another nice aspect is a longer amortization period. Most commercial real estate loans have a 25-year amortization period, but a 10-year maturity rate. That means you need to refinance at some point. With an SBA program, the loan is fully amortized over 25 years and you never have to worry about refinancing. Non-real estate loans can be financed for up to 10 years.
Although SBA loans aren’t subsidized by the government, the guarantee may be able to get you a better rate.
Are there disadvantages as well?
With 7(a) loans, there is a prepayment penalty in the first three years if the maturity is more than 15 years. Because 504 loans are financed through bond sales, they have longer prepayment penalties on those.
The SBA also may require additional collateral. You might put 10 percent down, but the SBA could want a house or other collateral to further secure the credit.
Finally, there also are fees. The 7(a) program has a guarantee fee of 1.7 to 2.8 percent of the total loan amount — the percentage goes up as the loan size grows. With a 504 loan, there’s a fee of about 3 percent of the CDC portion — the 40 percent financed through the SBA plus any fees charged by the first mortgage lender.
What recent changes have been made?
In addition to increasing the maximum loan amount from $2 million to $5 million, the definition of a small business has expanded. Instead of having different standards based on industry, the new alternate threshold is that the net worth of a company cannot exceed $15 million and profits over the last two years cannot exceed an average of $5 million. They have also loosened restrictions on line of credit programs.
There are two further changes being considered — simplifying the affiliation rules and eliminating personal liquidity tests.
The SBA has many cumbersome rules about what constitutes affiliate companies, and they’re attempting to simplify that so you have to own a majority of the business in order for it to be considered an affiliate. Someone might own 40 percent of a business with an SBA loan and not be able to qualify to get a loan for another business.
As for liquidity, the SBA has rules that you can’t have more than a certain amount of liquidity to be eligible for a loan. They’re looking to get rid of that test and just focus on whether it is a small business.
The changes are about helping more businesses that might need financing, which is the goal of the SBA.
Raymond Monahan is a senior vice president and group manager SBA Lending at Bridge Bank. Reach him at (408) 556-8384 or [email protected].
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