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Small Business Borrowing

A primer on SBA loan programs

By Mark E. Battersby -- Gifts and Dec, 6/1/2009 12:00:00 AM

Mark Battersby

The White House recently announced a $15 billion plan to ease the credit crunch affecting many gift and decorative accessories businesses. One program earmarks funding for loans and technical assistance by the U.S. Small Business Administration's (SBA) "microloan" lenders.

In addition to extra funding for microloans, the new program will reduce small-business lending fees and increases the amount the SBA will guarantee on some small business loans. However, the new program does not stop there.

The Recovery Program

The U.S. Treasury Department will boost bank liquidity, using $15 billion from the U.S. Treasury to purchase small business loans in the secondary markets. These purchases will free up lending by community banks, credit unions and other small business lenders that account for 40 percent of all SBA-backed lending.

Since banks depend on the secondary markets for liquidity, a local bank may now be more willing to lend to a gift business because it will have the confidence that the U.S. Treasury will be a ready buyer of the loan in the secondary markets.

The SBA will immediately raise guarantee levels on some of its loans and temporarily eliminate certain loan fees. Microloan intermediaries are providing loans of up to $35,000 to start-up, newly established and growing small businesses.

In addition to extra funding for microloans, new ARC Stabilization Loans offer 100 percent guaranteed deferred payment of loans up to $35,000 to help viable small businesses facing immediate economic hardship make payments on existing qualifying loans.

Come and Get it

The SBA does not actually make loans to businesses; it is primarily a guarantor of loans made by private banks and other institutions. SBA-backed loans do, however, carry lower interest rates and lower fees than their commercial counterparts, thus making them more affordable for entrepreneurs and small business owners.

An SBA guarantee gives gift and decorative accessories retailers, manufacturers and distributors access to the same kinds of reasonably priced, long-term financing available to large businesses by virtue of their size and economic clout. Borrowers apply for loans directly with a lending institution, such as banks, credit unions or Small Business Lending Companies.

The SBA estimates that over 25 million businesses nationally qualify as "small" under their guidelines — that is about 90 percent of all businesses. That encompasses everything except gambling-related businesses, non-profits, businesses that restrict patronage and some franchises that are on the SBA's "watch list."

Basic 7(a) Loan Guaranty

The 7(a) Program is the SBA's primary business loan program. Designed to help small businesses obtain financing when they might not otherwise be eligible through normal lending channels, the 7(a) Program is the most flexible.

Financing under this program can be guaranteed for a variety of general business purposes such as working capital, machinery and equipment, furniture and fixtures, land and buildings (including purchase, renovation as well as new construction), leasehold improvements and even debt refinancing. Working through commercial lending institutions, loans are up to 10 years for working capital and up to as much as 25 years for fixed asset funding is available.

The temporary elimination of fees for 7(a) loans can mean substantial savings. Typically, those fees have ranged from 2 percent to 3.75 percent. On a $300,000 loan with a 75 percent guarantee, for example, the guarantee would normally be 3 percent. With the temporary elimination of fees, the gift business borrower would save $6,750 ($300,000 × 75% × 3%). With the new 90 percent guaranty, savings would be $8,100 ($300,000 × 90% × 3%).

CDC "504" Loans

Designed as a long-term financing tool for economic development within a community, the SBA's 504 program helps gift businesses requiring "brick and mortar" financing. The 504 Program provides long-term, fixed-rate financing to small businesses to acquire real estate, machinery and equipment for expansion or modernization. The 504 Program cannot, however be used for working capital or inventory, consolidating or repaying debt or refinancing. Nor, can a business engaged in speculation, or investments in rental real estate qualify for 504 lending.

Under the 504 loan program, small means small if the gift and decorative accessories operation does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years.

Central to the 504 loan program is an entity known as a Certified Development Company (CDC). This entity is essentially a non profit corporation that has been set up to contribute to the economic development of its community. The 270 CDCs nationwide, work with the Small Business Administration and private sector lenders to provide financing to small businesses.

For a Section 504 loan, the 1.5 percent application fee frequently charged to a business applying to the Certified Development Company for a loan has been eliminated. For a typical $600,000, Section 504 loan, fees saved would equal almost $9,000. What's more, the SBA will temporarily eliminate the fee it charges the first mortgage lender, a fee equal to ½ percent of the first mortgage in a Section 504 loan transaction.

Microloans, the 7(m) Program

The SBA's microloan program provides short-term loans of up to $35,000 to be used by small businesses for working capital or purchases of inventory, supplies, furniture, fixtures, machinery and/or equipment. The SBA makes funds available to non profit community-based lenders (intermediaries) which, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan amount is in the neighborhood of $13,000. Unfortunately, the proceeds from microloans may not be used to pay existing debts or to purchase real estate.

The SBA makes or guarantees a loan to an intermediary, who in turn, makes the microloan to the applicant. Each intermediary lender has its own lending and credit requirements, of course, and will generally ask for the personal guarantee of the business owner as well as require some type of collateral. Each intermediary is also required to provide business based training and technical assistance to micro-borrowers.

How Much, How Fast?

The maximum loan amount for a 7(a) loan is $2 million. For 504 loans, the loan structures and amounts vary since lenders and borrowers each determine how much equity they are putting into the loan. However, for the SBA portion of the loan, the maximum amount is either $2 million or $4 million depending on the purpose of the loan. For most purposes, the SBA's maximum guarantee for any borrower remains at $1,500,000, or 75 percent of a $2 million loan.

It should also be noted that the U.S. Small Business Administration is itself an excellent resource (www.sba.gov) for small businesses. It also has a host of resource partners (www.sba.gov/localresources/index.html), including many participating lenders all too willing to assistan independent retailer, distributor or manufacturer or their gift and decorative accessories business reap the rewards of both the newly expanded SBA program and its other programs.

Today, thanks to their new program, a gift and decorative accessories business owner will immediately benefit from a 90 percent loan guarantee, as well as from reduced or eliminated fees on many SBA guaranteed loans. Microloan intermediaries around the country are already providing loans of up to $35,000 to start-up, newly established and growing businesses.

Author Information

Mark E. Battersby is a writer with more than 25 years experience of reporting the news and developments in the tax and financial arenas. He can be reached at MEBatt12@earthlink.net

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